I’m assisting a family member with finances. I’ve seen questions similar to hers often pop up over the years, but times are changing so rapidly that I think the answer probably has too!
At the age of 70, what is the best investment one can make with R500 000? One would have to stay on the conservative side, not wanting to lose a big chunk of life savings. It would be nice to supplement monthly income slightly too.
Would one consider high dividend-yielding ETFs like the Satrix Divi, or, with the rand being so strong, S&P500 maybe?
Thank you for your question.
Whether it’s investing for a comfortable retirement, saving for a dream holiday or securing a deposit for a house, we all have life goals that require money. We understand this and know that each person is unique, which is why we help construct funds based on what you want to achieve, how much you have to invest, and when the money is needed by.
The past few years have been particularly challenging for South Africa’s economy but there are many investment options your family member can choose from such as unit trusts, endowments, and guaranteed annuities.
Unit trusts investments
A unit trust is an investment product that pools the funds and then invests the funds in various asset classes such as cash, bonds, properties, and equities. There are various options that cater for different needs. If you want a low-risk investment, you can select the low-risk underlying funds that are invested in money market or cash but with a little bit of exposure to the equity asset class.
Many product providers such as Allan Gray, Momentum, or Glacier offer wide selections of underlying funds, ranging from conservative low-risk funds to aggressive high-risk funds which have proven excellent long-term performance. Unit trusts are well protected in South Africa and regulated by government legislation and industry standards.
Unit trust investments do provide a regular withdrawal option, and this withdrawal can be structured from all the underlying unit trusts or from a single unit trust in your portfolio.
Some of the drawbacks of a unit trust investment are that there are tax implications in terms of capital gains tax, you cannot nominate a beneficiary, and your capital is not guaranteed.
You also wondered if one should consider investing in exchange-traded funds (ETFs) such as the Satrix Divi or S&P 500 …
ETFs carry a higher risk as they track a specific index. If the index underperforms, this could have a negative effect on the overall performance. However, with unit trust investments, the funds are managed by a fund manager who can make relevant calls in different market conditions.
Investing offshore is one of the ways to achieve portfolio diversification. South Africa is an emerging market and can be seen as higher risk; this is because emerging markets are often very volatile while established markets offer the potential for steadier growth. By investing offshore investors can participate in developed markets and have exposure to hard currencies such as US dollar, pound, euro, and Australian dollar.
A South African can take up to R11 million offshore per calendar year subject to tax clearance from the South African Revenue Services (Sars). The clearance will generally be granted to any person whose tax affairs are in good standing with Sars. The first R1 million may be taken offshore without prior clearance from Sars.
Linked endowments provide a fixed after-tax maturity value at the end of five years. The benefit is based on assets from South Africa’s leading banks, and the endowment is underwritten by a certain life insurance provider. Investors looking for income during the five-year term can choose to include a term-certain annuity with the defined maturity value.
The bank provides the certainty of the defined after-tax growth at the end of five years. If the assets issued by the bank defaults, then you may receive less than the defined maturity value after five years. South Africa has a well-developed banking and financial market. The South African regulatory authorities are continuously following and implementing international good-practice initiatives.
Tax will be applied on the income received from the linked endowment according to the applicable tax tables.
A guaranteed annuity is defined as an insurance product that is purchased from an assurance company such as Old Mutual, Sanlam or Momentum. You are guaranteed to receive a specified monthly pension for the rest of your life from the life assurer. This insures you against investment risk and longevity risk. This pension will be paid to you until you die.
The downside of this type of annuity is that your money dies with you and no money will be passed on to your spouse or descendants. You will forfeit your savings if you die sooner than expected.
You can choose a guaranteed annuity that will pay you for a certain number of years, or that will continue to pay your partner or spouse although it will be a lesser amount. Keep in mind that the more protection you want to receive from your annuity, the less money you will be receiving every month.
Annuity rates are different and can differ from one life assurance company to another. Since you may receive a different income amount for the same amount you invested, you should look for the best available rate at the time.
Different factors are considered by life assurance companies when determining your annuity rates, such as your age, your health, your gender, interest rates, and your choice of an annuity.
It is very important for your family member to take into consideration the pros as well as the cons of the investments they choose to invest in. The investments recommended should provide them with enough insight to make a wise investment decision as it outlines not only the advantages but disadvantages too.