I have approximately R55 000 sitting in an FNB Global account (denoted in Australian dollars). I did a calculation to determine my growth since investing in November 2017. I worked out an annual return on investment (ROI) of 1.5% – factor in inflation of about 3% to 4% and that means my investment is being eroded.
I am now considering what to do with this lump sum:
- Invest it in my tax-free savings account or EasyEquities account (spread across various exchange traded funds – Satrix S&P500, Satrix MSCI World, Satrix MSCI World Enhanced, Sygnia 4IR, Satrix RESI and Satrix Nasdaq-100); or
- Pay a lump sum into my vehicle loan (Wesbank) which has an interest rate of 7.5%; or
- Invest it directly offshore (not sure of tax implications);
- Or a combination of all three.
I just don’t see myself leaving it in an account that may or may not ‘appreciate’ against the rand to any significant ROI.
Please note that the recommendations here are based on limited information. I would encourage you to engage in a more comprehensive discussion with a qualified financial planner in order to better understand the options that are available to you as well as the associated risk.
I have made the following assumptions:
- The money has a long-term time frame; and
- You have a bias towards investing offshore.
Unfortunately, interest rates are either very low or negative in most developed parts of the world, with rising fear of higher inflation. This would suggest that at this point in the cycle it doesn’t make sense to hold long-term money in cash or interest-bearing cash accounts. Depending on the bank and the amount of money involved, account holders are sometimes charged a fee to have the bank account, which further eats away at one’s return in a low-interest-rate environment.
Alternatives to consider
You have raised four viable options to consider as an alternative to the global cash account.
Paying off debt
One of the benefits of a low-interest-rate environment is that the cost of debt reduces along with the interest that one can accumulate from a savings account. Your vehicle finance appears to have an interest rate of prime plus 0.5%. When prime interest rates were around 9.5% to 10.5%, it made sense to consider paying off one’s debt as quickly as possible.
With the prime interest rate at 7%, the question becomes a case of the return expectations from growth assets to deduce the most appropriate course of action.
Tax implications of investing offshore
You could consider investing the money via a rand-denominated feeder fund or exchange-traded fund or ETF (such as the ones that you have listed) while the rand amount is still relatively small and at a later date, consider converting it to a foreign currency. The tax implication of investing directly offshore in US dollars or British pounds is that any depreciation in the original rand amount is non-taxable. If you were to invest via a rand-denominated feeder fund, any depreciation in the rand would be taxable.
This excludes considerations such as Situs tax.
Investing in a tax-free savings account
A tax-free savings account is a great investment vehicle for investors to accumulate wealth while having the flexibility to invest in any asset class. An investor could invest 100% of the capital offshore via a rand-denominated feeder fund while benefiting from the depreciation in the rand without having to pay tax on the currency gain.
Based on the return expectations from growth assets, as well as a low-interest-rate environment, I would recommend that you consider using a tax-free investment to accumulate your wealth.
This will allow you to invest offshore and benefit from the long-term depreciation in the rand. It also gives you liquidity should you choose to withdraw the money. This could be an important consideration in the event that interest rates start to rise meaningfully in South Africa, in which case you may want to pay off your car. However, based on the consensus, it seems unlikely that interest rates will rise meaningfully in South Africa over the short- to medium term.
I wish you all the best in your financial plan.