I am 39 years old and save a decent amount a year from working abroad. I have a private banking account simply for ease of international transfer. My problem is I don’t earn any interest on the capital. My bank advised me to get a money market account. They pay between 4% and 5% interest. The goal is to save money to buy a house. Where can I earn the most interest and what will the tax implication be (apart from the expat tax recently introduced)?
Thank you for your question!
It is exciting that your journey towards saving for a home has started. I am not sure what your timeline is and what amount you plan to save every year. I do, however, advise diversifying your portfolio more to optimise your returns in line with your goals.
The term of your investment will however play a big role in the investment advice. For a shorter-term goal of one to two years, it is advised to rather be invested in cash-based funds. This is to protect you against any possible market volatility in the short term to ensure you will achieve your investment goals.
Should the investment term be longer, we have the opportunity of diversifying more and building a more resilient, well-diversified portfolio which includes all the asset classes: cash, bonds, property and growth assets (local and offshore equity exposure). At PSG Wealth we believe in optimally diversifying your portfolio. We achieve this by following a multi-manager approach. We also believe in including all the asset classes where possible.
It’s not about timing the market, or an asset class, as they all behave uniquely in different market circumstances.
Including all of them is the best way of eliminating risk and ensuring an optimal performance in your portfolio.
Being invested in a money market fund at the beginning of this year was not a bad investment choice for a shorter-term goal. However, due to a few interest rate cuts, yields have decreased quite a bit, and therefore it is necessary to revisit your investment approach in line with your objectives and goals.
Including some growth assets in your portfolio is advised over the longer term as they have historically outperformed cash over the long term. As these assets can be more volatile, we just need to allow them to have some more time in the market. By building a well-diversified portfolio, you keep the benefit of having quick accessible (liquid) funds through the components that are still invested in cash instruments, but you will also benefit from higher returns by enjoying the exposure to growth assets (by essentially owning units/shareholding in listed companies).
The graph below compares the STeFI (short term fixed interest) composite index, a benchmark widely used for money market funds, with a well-diversified investment portfolio. Since 2020 has caused many changes in the return of asset classes, and to keep up with an ever-changing environment, it is essential to monitor, review and rebalance your portfolio, when necessary, to achieve your goals and objectives.
The asset allocation of this diversified portfolio follows a multi-manager approach and is as follows:
The graph below shows the decrease in the STeFI index over the past few years, compared to the same diversified portfolio as used in the graph above.
In the long run, a diversified portfolio is better able to outperform cash, and a suitably diversified investment should therefore be considered if you have a longer time horizon at your disposal.
On voluntary investments there can, however, be a few possible tax implications. Firstly – depending on which underlying asset classes you are invested in, for example:
- Interest earned:
You earn interest from cash/bonds on which you will be taxed. Income tax certificates will be provided yearly. Certificates will show the respective amounts of interests earned during the tax year. For individuals below 65 years of age, the first R23 800 of interest earned is exempt and for individuals over 65 R34 500 is exempt.
- Dividends earned:
Dividends are earned from equity exposure. Local dividends earned are exempt, however foreign dividends are taxable and will be included for income tax purposes.
- Capital gains tax:
Capital gains tax (CGT) is triggered whenever you dispose of units and make a capital gain. You are not liable to pay CGT simply because your investments grew in a particular tax year. You realise a capital gain or loss on unit trust investments only once you dispose of the units. Disposals typical includes: making withdrawals or switches between funds. If you remain invested in the same unit trust fund, you could avoid paying CGT for as long as you remain in that unit trust fund. Investors should be careful, however, not to lose sight of their overall investment goals and objectives when considering ‘deferring’ CGT. CGT is merely one aspect to consider as part of your investment decisions. The Income Tax Act provides that a capital gain must be included in the taxable income of a taxpayer for the year of assessment. Individual taxpayers (natural persons) who realise a capital gain will be able to exclude R40 000 of any gains in the particular year of assessment. 40% of the aggregate capital gain will then be included to your taxable income and taxed at your marginal income tax rate.
When it comes to optimally structuring your investment portfolio, it is always advisable to consult a suitably qualified financial advisor. They will be able to ensure your portfolio is structured to meet your needs, and will also be able to provide guidance on the tax implications of the products you select.