Financial freedom is about making the right choices

Back to the basics

Before considering investment vehicles and funds, it is important to take note of a few financial planning basics.

• If you have people that are dependent on you – especially if you don’t currently have sufficient assets for your dependants to draw an income from if something were to happen to you, risk cover is critical. This includes death and disability cover.
• It is crucial to have a valid will in place. This helps to ensure that assets can be transferred to your loved ones as quickly and efficiently as possible. The absence of a will makes this process much more complicated for your dependants at a time they can least afford it.
• Setting up a trust for intergenerational assets is another useful way to create tax and estate-planning efficiencies in the legacy you leave your dependants.

The diverse South African product set – helping you to create a financial legacy

The goal of financial freedom is to live life on your own terms, and the sooner you start planning your financial future, the better. Some of the main factors to consider before deciding on an appropriate investment vehicle for your family’s needs are included below.

• What is the time horizon of the investment? Are you saving for a specific short-term goal, or are you saving for retirement (which has a much longer investment horizon)? For example, when saving for a short-term goal, you should ensure that you choose an investment vehicle which allows funds to be accessed readily, such as a discretionary unit trust investment.
• What is the objective of the investment?

The table that follows highlights the key features of the main South African financial products to help you make informed product choices.

Product	Key features that drive choices
Retirement annuities (RAs), preservation funds and employer retirement funds	Retirement fund products play an essential role in helping you achieve financial freedom in the long run. Contributions to RAs are tax deductible within certain limits, so they are an effective vehicle in reducing your tax liability. Returns on these products are tax exempt. It’s important to start contributions to RAs as early as possible to make use of the compounding effect of the untaxed investment returns. Access to these products before retirement is currently very limited.
Tax-free savings accounts (TFSAs)	In terms of investment options, TFSAs provide more flexibility than retirement products (which have asset class restrictions in accordance with Regulation 28 of the Pension Funds Act). You won’t pay any tax on returns within a TFSA. The amount you can invest in these products is subject to contribution limits of R36 000 per tax year and R500 000 over your lifetime. If you withdraw funds from a TFSA, you can’t replace that withdrawal amount. The total lifetime contribution limit is R500 000, regardless of whether funds are withdrawn or not. While funds within a TFSA can be easily accessed, you need to be aware that doing so will reduce the benefit of tax-exempt returns offered by remaining invested for a longer period of time.
Endowments	Endowments facilitate tax-efficient investing for individuals who fall into a marginal tax bracket in excess of 30%. This is because the tax rate on investment returns in endowments is fixed at 30% for individuals (regardless of their marginal tax rate). Endowments allow you to nominate beneficiaries which allows assets to be transferred to your dependants easily and efficiently without having to wait for the estate to be wound up. Access to funds in an endowment carries restrictions within the first five years.
Discretionary investments	Discretionary investments don’t offer any specific estate planning- or tax benefits, but offer significant flexibility in terms of access to funds. They are a very useful savings vehicle when you have a specific savings goal in mind, for example saving for a child’s education.
Living annuities	Living annuities are designed to provide an ongoing income in retirement. Because of the long-term nature of living annuities, maintaining the optimal fund allocation and withdrawal rates is critical to ensuring your capital can sustain you throughout your retirement years. Like endowments, living annuities allow you to nominate beneficiaries, which allows assets to be transferred to dependents easily and efficiently without having to wait for the estate to be wound up.

 

Choosing appropriate underlying investments for a product

Equally crucial to product choice is choosing underlying investment instruments suited to the objectives and time horizons of your investments. For example, when saving for retirement or investing for your children, growth assets are more suitable because the longer investment horizon allows for greater tolerance of short-term volatility. However, when saving for a shorter-term goal, interest-bearing assets are likely to be more suitable as they are less volatile.

Key questions to answer when selecting funds

1. What are your investment goals, and what is your risk tolerance?

• If you have a short-term investment goal, an investment allocation to growth assets (like equities) may not be suitable as they are more volatile and have a higher likelihood of short-term losses.
• Are you willing to tolerate large swings in your investment’s value for the chance of greater long-term returns? While large swings in your investment’s value may be discomforting, allocating too little to growth assets may result in you not meeting your investment goals. There is a fine line between risk aversion and taking on the risk required to meet investment goals.

2. Do you have an appropriate mix of asset classes within your portfolio?

By including different categories of assets within your portfolio, you reduce the risk of experiencing major losses. Market events or conditions that cause one asset category to perform poorly may cause another asset class to perform well. A well-diversified portfolio also reduces volatility.

3. Are you focused on the long-term?

Don’t be tempted to react to short-term market movements. Having clearly set out investment goals and time horizons will help you remain focused on the long term. A long-term investment horizon positions you to ride out the inevitable periods of heightened volatility associated with exposure to growth assets needed to maximise investment growth.

PSG Wealth’s market-leading fund range
PSG Wealth has developed a market-leading range of funds which are well-positioned to help you meet your investment goals and objectives when paired with a suitable product.

Creating a lasting legacy

The diversity of products and funds available to investors means that creating a lasting financial legacy for future generations is more accessible than ever before. There are many factors to take into consideration when creating a robust financial plan however. Seeking advice from a certified financial adviser appropriate to your family's unique goals and objectives is the first step to achieving your dream of financial freedom for your family.