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Dear reader,
Thank you for your question.
Choosing to reinvest the funds from your rental income is a great idea. There are a few investments you can consider, like local unit trusts and offshore unit trusts. A unit trust investment is the best type of investment as it does not limit you on the amount of risk you would like to take, and it is a liquid investment.
A unit trust is an investment in which investors’ money is pooled together by investment managers and used to purchase assets. The number of units you own within the unit trust is determined by the amount used to invest into the unit trust and the price per unit. There are people who will be designated to manage your funds, and they are called fund managers. You can invest in a local unit trust or an offshore unit trust.
Local unit trust
- You do not need a lot of money to start investing, you can start investing from as little as R1 000, depending on the product provider you choose to invest with.
- You can invest via monthly debit order or a lump sum.
- There is a fund manager to take care of your funds.
- Diversification of funds – you can choose to invest in different types of asset classes, namely bond funds, equity funds, money market funds, property funds and derivatives.
Offshore unit trusts function the same way as local unit trusts, however most of the time a large sum of money is required to start an investment. Once you have gathered enough funds over the years, you can then invest offshore. Offshore investing is a good way to achieve capital appreciation as you are awarded the opportunity to spread your risk across different economies and geographic regions. Considering the volatility of the rand, offshore investing is a good way for one to expose themselves to better or developed markets.
Direct offshore investment
- The investment will have underlying funds that are foreign currency denominated.
- You can invest using rands and the funds will be converted into the fund currency you choose to invest in.
- If you are already in possession of foreign currency, all the better because you will then have the option to simply transfer your funds directly into the product provider’s account.
- Therefore, depending on the foreign currency funds available from the product provider, you may choose the fund you would like to invest in.
- These include US dollar, Australian dollar, Hong Kong dollar and British pound funds.
- To start investing, the minimum investment starts from R20 000 to R50 000 depending on the product provider you choose.
Indirect offshore investment
- The investment will have underlying funds that are rand-denominated.
- You can invest into a unit trust with funds (feeder funds) that have exposure to offshore markets.
- There is no need to convert your funds into another currency as the underlying funds are rand-denominated.
- To start investing you may choose to use the debit order option, which usually starts from R1 000 per month, or invest a cash lump sum.
- To further diversify your retirement annuity, you could also choose underlying funds that have exposure to offshore markets; this allocation is however limited to 45% offshore.
Tax considerations
When withdrawing from a unit trust you may be liable for capital gains tax. Furthermore, when investing directly offshore it is important to know that you can invest up to R1 million without having to apply for a tax certificate, while any amount above R1 million will need a tax clearance from the South African Revenue Service (Sars). The maximum you can invest offshore per year is R11 million. When making withdrawals and switches, this may trigger capital gains tax.
Endowment policy
Another investment you can consider is an endowment policy, where you can also choose the underlying funds you would like to invest in, depending on which product provider you would like to invest with.
This type of investment is suitable for those who want to invest long-term and will not need the capital anytime soon as the investment has a legal restriction period of five years, whereby you will only be allowed to have one withdrawal. It is also suitable for people with a high marginal tax rate (above 30%) as the returns and interest income are included in your taxable income and are taxed as per marginal tax rate but capped at 30%.
The advantage of an endowment policy is that you can also get a life cover benefit that is paid to the nominated beneficiaries upon the death of the life assured. With some product providers, the endowment is a pure investment, therefore only the proceeds of the investment are paid out to the beneficiaries – and there is no life or disability cover. Not only can you choose a beneficiary of proceeds, you can also choose a beneficiary of ownership. Choosing a beneficiary of proceeds can be a plus as it provides an estate duty benefit.
If the life assured is the policyholder or the spouse of the policyholder, the policy is held for at least three years and the death benefit in the deceased estate is paid out to the child, stepchild, surviving spouse or parent of the deceased. The benefit will be protected from creditors by the Long-term Insurance Act.
Investing in an endowment policy can be as simple as investing a lump sum or starting a debit order as long as you do not exceed your yearly limit, which is 120% of your previous contribution, otherwise your restriction period could start over.
Given such great choices for investing, you should also consider factors like your risk appetite, risk capacity, liquidity of funds, age, and availability of funds. For further guidance on choosing what investment would be most suitable for you, please do not hesitate to contact us or your financial advisor.
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