Share investing is an important way of creating wealth over the long term. When you buy shares issued by a company, you become a shareholder. Owning shares gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else. The importance of being a shareholder is that you are entitled to a portion of the company's profits, which is the foundation of a share’s value. The more shares you own, the larger the portion of the profits you get. Many companies, however, do not pay out dividends, and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock. You can buy shares of companies listed on a stock exchange, such as JSE, through a reputable stockbroker. Your return from owning shares comes from two sources: dividends paid to you, and increase in share price (capital gains). Dividends received are subject to 20% Dividend Withholding Tax; capital gains are subject to Capital Gains Tax. Share price can go up or down. When share price goes up, you make a profit on paper. When share price goes down, you make a loss on paper. Before you invest in shares, you must do your research. You should identify the companies you would like to invest in, have a good understanding of their business, management, prospects and financials. You should have a good grasp of how to calculate the value of a share. After you have bought shares in a company, you need to continue to monitor its business activities, management changes and financial performance, to determine whether it is appropriate to stay invested. Working with an experienced stockbroker with good research capability will add value to your share investing process. Having a good understanding of technical analysis will help buying shares at better prices. Share investing is a long-term activity. It is NOT buying and selling shares regularly in the hope of making quick profits. If share investing looks like too much work for you, rather work with your trusted financial advisor to invest in a couple of good equity funds (High Growth Unit Trusts). Example: Siya invests R100,000 in the shares of a listed company, at a share price of R10 each. So she owns 10,000 shares. Every year the company declares and pays R1 dividend per share. 10 years later the share price rises to R40. Siya’s share portfolio is now worth R400,000. Over the 10-year period, Siya has profited from her investment as follows:
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This group of unit trusts typically has a relatively low weighting, up to 40% of the money, invested in the stock markets, or equities. Most Stable Growth Unit Trusts invest the majority, some up to 100%, of their money in fixed income instruments such as bonds and money markets. It may have some exposure to property and offshore fixed income.
Generally this group of unit trusts invest its money to provide a relatively stable stream of income and return to its investors, so it is conservative in its risk management approach. The risk of capital loss over any 12-month period is low. Return profile: Expected stable high returns over the short term (1 to 5 years), on average 7% to 9% per annum. Volatilities: Stable Growth Unit Trusts’ price movements are muted compared to Balanced Growth Unit Trusts. Money Market unit trusts have a constant price of R1. Who is it suitable for: • Older, conservative investors for whom wealth preservation is very important. • Corporate cash management for enhanced yield. • Investors looking for short-term investment objectives (1 to 5 years). In March 2015 the then Finance Minister Nhlanhla Nene introduced Tax-free Savings Account, to incentivise the general public to save money. Any South African with a 13-digit ID number can invest in a tax-free savings account, with an annual maximum of R33,000 in a tax year and a lifetime contribution of R500,000. All growth in your Tax-free Savings Account is completely tax-free. No capital gains tax, no dividends tax and no income tax from interest earned… ever! Withdrawals from your tax-free account are tax free. You may access your money at any time without penalty. Government stipulates that products are simple to understand, adequately transparent and suitable for investors. No performance fees are allowed. Most financial institutions offer Tax-free Savings Account: banks, life insurance companies, fund managers, investment platforms and JSE stockbrokers. Return profile: If it is a bank deposit product, you may get an interest rate of between 5% and 7%. If the underlying investments are unit trusts, it will depend on the type of unit trust you invest in. Who is it suitable for:
A word of advice: I consider Tax-free Savings Account to be the third Financial Wonder in South Africa. You should use Tax-free Savings Account as a long-term investment vehicle (10-years plus), using unit trusts with highest long-term expected return (such as Offshore Unit Trusts) as underlying investment. This way you will truly benefit from a Tax-free Savings Account. Don’t use Tax-free Savings Account as a normal savings account or transactional account. Many people have negative perceptions about retirement annuity. I must state categorically that this is a powerful tool in any investor’s financial and tax planning. A retirement annuity is a long-term investment structure for building retirement savings, either on a recurring basis or by making a lump sum investment. A retirement annuity offers significant tax advantages to people who are committed to investing their money until they are at least 55 years old. A portion of your retirement annuity contributions is tax deductible. The current legislation allows you contributions to retirement funds of up to 27.5% of your taxable income as tax deduction, subject to a maximum of R350,000 in a tax year. All your investment growth, including interest, dividends and capital gains within a retirement annuity is tax free.
At retirement age, you may withdraw a portion of your retirement annuity account tax free. Currently the first R500,000 lump sum benefit is tax free. The balance of the account will be used to purchase a fixed annuity or living annuity, to give you a monthly income. You can select the underlying investment portfolios in a retirement annuity. These investment portfolios are compliant with Regulation 28 of the Pension Funds Act, to ensure your money is invested prudently across a number of asset classes. Before retirement, there are three scenarios where you may access money in your retirement annuity account: In the event of your death, the money is paid out to your beneficiary. In the event of ill health and you are unable to work, you lodge a claim for a disability benefit – and not a withdrawal benefit – from your retirement fund. When you emigrate or when you leave South Africa due to an expired work visa, you can withdraw the full value in cash (subject to tax). There are two types of retirement annuity products: Life assurer retirement annuity and unit trust retirement annuity. With a life assurer retirement annuity, you enter into a contract to commit to pay contributions until your selected retirement age. Should you reduce or stop contributions during the first half of the term, you will pay a penalty charge, which reduces your retirement annuity account value. Some life assurers will reward you with bonuses paid into your account for being disciplined with your monthly contributions over the term of the contract. While a life assurer retirement annuity is rigid, a unit trust retirement annuity gives you flexibility. You may increase, reduce or stop contributions at any time without penalties. You may wish to consider investing in a retirement annuity fund if:
A word of advice: If compound interest is the first Financial Wonder, then I consider retirement annuity to be the second Financial Wonder in South Africa. Since 1 March 2011, special tax rates apply to severance benefits, based on the retirement lump sum tax table. This means that the first R500 000 is not subject to tax, the next R200 000 is taxed at 18%, the subsequent R350 000 at 27% and all amounts above R1 050 000 at 36%. Leave pay and pro-rata bonuses that are paid at that time do not form part of a severance benefit and are subject to normal income tax.
To qualify for this special “severance” tax rate, the employer must pay you a lump sum as a result of your employment having been, amongst other things, terminated or lost, for example if:
It is important to understand that this severance benefit is, for tax purposes, treated as a retirement lump sum payment. This has the following consequences:
Retrenchment benefits.The retrenchment benefit refers to the withdrawal from your employer’s retirement fund at retrenchment (as per the above criteria). Such a retrenchment benefit is also taxed per the retirement lump sum tax table, again subject to the cumulative value of any previous retirement fund withdrawals made. Important caveat: You can transfer this benefit to a preservation fund, but if you do, it loses its “identity” as a retrenchment benefit. Although you will be entitled to make one full or partial withdrawal from the preservation fund before retirement (earliest age 55), this will be taxed as a normal withdrawal from the preservation fund, per the withdrawal lump sum tax table: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%. This is an important consideration! If you choose to preserve your retrenchment benefit with the intention of accessing this money before retirement, you lose out on the-tax free benefit you could have enjoyed, either at the time of retrenchment or at retirement. To get advise on your severance benefit, please contact Kevin or Ray, email: invest@daberistic.com tel no: (011 658-1333) Source: 10x This group of unit trusts has 100% of the money invested in offshore assets, predominantly in offshore equities. It may have some exposure to the listed property sector, as well as cash and bonds. Given the fact that South Africa only accounts for 0.5% of the world economy, and there are many excellent, well-known international companies not available for investing in South Africa, I encourage investors looking to maximise their returns over the long term to allocate a high percentage of their portfolio to Offshore Unit Trusts. You will also benefit from expected Rand depreciation against the US Dollar over the long term.
International giant brands not available for investing in South Africa include: Alphabet (parent company of Google) Amazon Apple Berkshire Hathaway Microsoft Nestle Samsung Unilever Return profile: Expected high returns over the long term (10 years plus), on average 12% to 16% per annum Volatilities: As stock markets fluctuate, reacting to news and market sentiments, offshore unit trusts also fluctuate daily. It goes up one day, down the next. It goes up one month, maybe down the next. In addition, there is also exchange rate fluctuation, which may magnify price movements if you invest in Rand-denominated Offshore Fund locally. Who is it suitable for:
This group of unit trusts typically has a relatively high weighting, up to 75% of the money, invested in the stock markets, or equities. Most balanced (or known as multi-asset, high-equity) unit trusts invest according to Regulation 28 of the Pension Funds Act, which means up to 75% of its money invested in equities, up to 25% invested offshore, up to 5% invested in Africa, with the balance invested in bonds, money market and property. It may have some exposure to precious commodities such as gold.
Generally this group of unit trusts invest its money for retirement fund members in South Africa, so it is fairly moderate in its risk management approach. It would not want to risk people’s retirement savings. It invests in quite a number of different assets and different companies to diversify. Return profile: Expected higher returns over the long term (5 to 10 years plus), on average 8% to 12% per annum. Volatilities: As stock markets fluctuate, reacting to news and market sentiments, balanced unit trusts also fluctuate daily. It goes up one day, down the next. It goes up one month, maybe down the next. However, the price movements are muted compared to High Growth Unit Trusts. Who is it suitable for:
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