Prudential Investment Managers

Prudential Investment Managers

December 2018

Words of wisdom for the festive season

It’s hard to believe that the festive season is already upon us.  It’s the most wonderful time of the year, but it can also be a perilous period for your finances. Luckily it is possible to enjoy the festivities and still start the year off on a healthy financial footing. Find out how…

Beware the dark side of compound interest

Be sure to avoid funding the festive season with debt. While compound interest works heavily in your favour when you’re investing, it works just as hard against you if you don’t pay off your credit card every month. The interest is added to the balance of your debt, which means that you pay interest on your interest charges as well as on the loan itself. 

Budget for the better

We all know that knowledge is power, so prepare a festive season budget and track your expenditure carefully. Rather than constraining you, a budget assists you to prioritise your investing and spending during the holidays. This process will help teach you the true worth of money and is one of the most powerful tools for long-term wealth creation.

Use your 13th cheque wisely

It’s been a difficult year financially and not every company is able to afford to give their employees bonuses. If you’re lucky enough to earn one, be wise and regard it as a unique opportunity to invest more. Here are some options:

Open a tax-free investment

The taxman doesn’t often give us gifts, so when he does, we should embrace them. Tax-free investments are  a great way to supplement your retirement investments, but they also work very well for other vital, long-term expenses like education and home deposits. Because there is no tax on the SA income or dividends within the funds, their growth is “accelerated”. And you don’t even have to pay capital gains tax when you withdraw the funds.

Because tax-free investments don’t have to comply with Regulation 28 of the Pension Funds Act, you can allocate a significant portion to offshore investments, such as Prudential’s range of three rand-denominated tax-free global funds. They are an excellent diversifier and can be a good hedge against emerging market risks (such as currency depreciation), which is great if you’re planning to use the funds to educate your children overseas.

Top up your RA

You can also use your bonus to top up your retirement annuity (also called an RA), before the end of the tax year. RAs give you three gifts from the taxman.

  1. Contributions are tax-deductible up to a maximum of 27.5% of your taxable income or R350,000 for the year of assessment. This reduces your marginal tax rate and frees up cash to invest elsewhere.
  2. There is no tax on the growth within the fund, which – thanks to the good side of compound interest – results in a significant long-term win.
  3. RAs are effective estate planning tools as you are not obliged to transfer the funds to a compulsory annuity upon retirement. If you leave the RA intact, the investment won't form part of your estate, and the funds will pass directly to your nominated beneficiaries.

You can purchase an RA on a LISP platform and use one of Prudential’s multi-asset solution funds (such as the Prudential Balanced Fund or the Prudential Inflation Plus Fund) as the underlying investments.

Be wise about your house 

Homeowners can also use their bonuses to reduce their mortgage. Before you do so, however, be sure to discuss all your circumstances with your financial adviser.  For example, it may be best not to pay off the mortgage on an investment property as the interest portion of the payments is tax deductible. 

Your age is another factor. If you’re young and can afford the risk of an aggressive portfolio, there’s merit in keeping a mortgage since the post-tax return on the investment is likely to be higher than the mortgage rate. You should also consider the need to diversify: if you’re already overexposed to property, you may be better off investing your bonus elsewhere.

Following these tips should help you emerge from the festive season with your finances intact and ready to make a healthy financial start to the new year.

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