Investment planning seeks to accomplish two equally important goals that naturally conflict with each other. The first goal is to maximise returns on investments. The second is most often to minimise investment risk. Effective investment planning seeks to balance these two goals in all areas of the investment planning process so that the investor can achieve the desired outcomes. Broadly speaking, every investor seeks to achieve one or a combination of the following objectives:
- Wealth creation
- Wealth protection
- Income generation
Investment can broadly be categorised in 2 distinct areas; being discretionary/voluntary and compulsory investments. Discretionary investments are savings towards a specific goal, for a specific time or date. Compulsory investments focus on saving towards the provision of income on retirement and also deal with the compulsory investment options available on date of retirement from such products. Investments can either be funded by way of a lump sum, recurring premium or combination thereof.
Investment Principles
It is a widely accepted principle of investing that risk increases with the potential for higher returns. Just as risk means higher potential returns, it also means higher potential losses. Diversification refers to the spreading of an investment portfolio over many investments to avoid excessive exposure to any one source of risk. Your investment plan also needs to take into account liquidity and taxation implications for each investment.
Retirement Planning
Broadly speaking, every investor seeks to achieve one or a combination of the following objectives on retirement:
- Wealth protection
- Income generation
Typical investment products
Tax Free Savings Account
The Tax Free Plan is a simple and transparent savings solution for your savings needs. All growth in the plan is completely tax free. The government has set up regulations that currently limit you to investing a maximum of R33 000 per tax year and R500 000 over your lifetime in any tax free products. You choose the underlying investment funds, in which your money is invested, to meet your specific investment strategy. You do not have to commit to a specific investment term. You can disinvest money from your plan at any time. There are no disinvestment charges.
Endowment
An endowment is a type of investment policy which is effected in the name of the underlying insurance company involved. Any growth within the product will therefore be taxed in the name of such insurance company at a rate of at least 30%. This type of policy is therefore suitable for an individual with a marginal tax rate of more than 30%. The minimum term for an endowment investment product is five years. There is no maximum term. An endowment has an initial restriction period of five years, during this time you can access your investment by way of one loan or one withdrawal (terms and conditions apply). There are restrictions to your contributions to your endowment which could lead to the start of a new five year period to be applied to the investment.
Collective Investment (unit trust)
Unit trusts use the combined money of investors to invest in global stock markets and economies. This money is managed by investment professionals, called portfolio managers, who buy shares and other asset classes on behalf of their clients, according to the unit trusts mandate. Simply put, unit trusts offer an easy, convenient and affordable way to invest in shares and other asset classes. An added benefit is that because a unit trust is made up of more than one investment, the portfolio manager can make decisions to buy assets that are performing well, and sell poorly performing assets, in order to meet the objective of the unit trust, and your investment goals. There is no contractual term and you may sell your investment at any time. However it is recommended that you view your unit trust portfolio as a medium to long-term investment.
Retirement Annuity
Retirement planning consists of two phases: pre-retirement funding and post-retirement income. Pre-retirement funding means investing in a retirement annuity. Membership of the Retirement Annuity Fund is independent from your employer and is not affected when you changes jobs. Contributions are tax deductible limited to certain amounts but income tax is payable on any lump sum taken at retirement. You can retire from the fund at any time after reaching the age of 55. You can only retire early because of ill health or disability, subject to the rules of the fund. A maximum of one-third of the investment amount at retirement may be taken as a lump sum and the balance must be used to purchase an annuity or a regular pension income.
Pension Fund
A Pension Fund is a membership agreement between employer and employee. Both the employer and employee can make contributions to this fund, with certain deductions allowable for purposes of income tax. On retirement, as determined by the rules of the Pension Fund, a lump sum of 1/3 of the total is available. This lump sum is taxable taking into account any deductions and tax-free portions. The balance is to be used to purchase a compulsory annuity or monthly pension.
Provident Fund
A Provident Fund is a membership agreement between employer and employee. Both the employer and employee can make contributions to this fund, with certain deductions allowable for purposes of income tax. On retirement, as determined by the rules of the Provident Fund, the entire amount is available. This lump sum is taxable taking into account any deductions and tax-free portions. The balance is then tax-free and can be utilised as the investor choses.
Preservation Fund
A Preservation fund is either defined as pension or provident preservation funds. Any person may transfer a retirement fund benefit, in the form of either pension or provident fund benefit, to a preservation fund of choice. No recurring contributions are however allowed. A split transfer between one preservation fund and one retirement annuity is allowed. The retirement benefits are dealt with the same was as a normal pension or provident fund. There is no maximum age of retirement from a preservation fund. A member may make one withdrawal from a preservation fund which will be taxed as any other withdrawal from a retirement fund.
Guaranteed Annuity
A Guaranteed Annuity guarantees you an amount of money over a period of time in return for a single premium. An insurer carries the investment risk of ensuring that they have sufficient funds to pay you for the rest of your or your spouse’s life, depending on the option selected. The options to be considered are firstly a Single-life or Joint-life Annuity, then you can choose between a Level Annuity, Escalating Annuity, Capital Back Annuity or Guaranteed Term Annuity.
Equity Linked Living Annuity
The Equity Linked Living annuity is an annuity that provides you with an annual income of between 2.5% and 17.5% of the value of your retirement after retirement. The annuity or income amount is not guaranteed but is dependent on the performance of the underlying instruments you are invested in. The annual income level an only be changed on the anniversary date of your retirement. The product allows flexibility in the choice of your income level and underlying retirement instruments. The proceeds of your retirement can also be paid to your beneficiaries upon your death.
