I am able to save R100 000 a month but don’t know where to invest the money. I am a 38-year-old female, with no debt. My home and car are paid off. I have R2.5 million in shares. I have maxed out my pension contribution. I’d like to diversify a bit but I’m not sure of where to go. I’m not interested in property investment due to the admin (I’ve done that previously). It seems a waste to be sitting in a money market account. I have saved throughout my career with no contributions from family/spouse etc. I am not a big spender but not averse to educated risk-taking.
It is wonderful to see how well you have built your financial position at such a young age.
There are a few objectives to consider when building the optimal investment portfolio:
- Tax efficiency – investment vehicles and asset allocation;
- Retirement planning;
- Diversification with asset classes – ensuring optimal returns;
- Ensuring you have liquidity (emergency funds); and
- Estate planning.
Taking your existing portfolio into account, you are already optimising your annual tax benefit by maximising the annual deductibility of your retirement fund contribution – this is a fantastic starting point. Secondly, you have a share portfolio, and given that you are not averse to taking calculated risks, I will advise analysing these shares again ensuring you have sufficient diversification between local and offshore exposure.
Not enough information is provided to understand your exposure to offshore and local shares. An important factor to keep in mind with regards to offshore assets is that on death, both the UK and the US levy an estate duty on certain situs assets, i.e. certain assets that are physically situated within their jurisdiction. This is important to note if you have assets in either country.
So, on death, you will be liable for SA estate duty, as well as a potential 40% situs tax on your US and UK situs assets. It is important to ensure that the executor of your estate is aware of the situs applicable to your assets. An offshore will may be recommended.
I would advise structuring two types of vehicles with the R100 000 you have available.
Firstly, making use of a tax-free investment. The annual limit is R36 000, and R500 000 in your lifetime (contribution limits). This investment offers great tax benefits in the long run. Any accessible portfolio (including your existing share portfolio) will have capital gains tax consequences in future. A tax-free investment offers a great opportunity to have 100% equity exposure (this can be 100% offshore) and there will be no tax payable on any proceeds. For this reason, I would advise allocating 100% to equity exposure when structuring a tax-free investment to optimise your tax benefits.
Secondly, I would advise structuring a voluntary or flexible investment with the remainder of your monthly savings. In this portfolio, you will invest in collective investment schemes which could follow a more diversified approach by including all asset classes; cash, bonds, local and global equity exposure.
The cash and bond components will provide liquidity should you have any requirement for short-term withdrawals.
Combining all asset classes also ensures a more resilient portfolio through different market cycles.
Depending on the offshore exposure you currently have in your share portfolio, and considering your risk profile, you may consider having an offshore focus in this portfolio. Your pension fund is currently regulated by Regulation 28, and this regulation places a limit of 30% on offshore exposure. South Africans are therefore mainly overexposed to one region, as our retirement funds, income and property investments are normally mainly based in South Africa.
A voluntary investment does not have any limitations to offshore exposure, so you can increase your exposure here by making use of a feeder fund.
A feeder fund allows you to have offshore exposure but the investment is still rand-dominated.
I would advise speaking to a wealth advisor to assist you with the structuring of these investments and to ensure the asset allocation complements your existing portfolio.