When it comes to investing, selecting the right vehicle is critical to achieving your financial goals. Each investment vehicle offers distinct advantages, risks, and tax implications, making it essential to choose wisely based on your unique circumstances. Understanding your options is the first step toward building a successful investment strategy and in this article, we explore the various vehicles available to help you make informed decisions.
Access bonds
If you have an access bond, keep in mind that it’s a great place for extra savings. This facility lets you make extra payments on your home loan and withdraw these funds as needed. When you make surplus contributions, the bank reduces your loan’s capital amount, meaning you’ll pay interest on a smaller sum. Plus, you won’t pay tax on the interest saved. Note that most home loans don’t include an access bond automatically. You’ll need to apply for this feature with your bank either when you register your bond or later, provided you’ve managed your home loan account well. This facility not only helps you save on interest but also offers financial flexibility.
Keep in mind that an access bond doesn’t allow you to withdraw all the money you’ve paid towards your bond—only the extra funds paid beyond your monthly repayments are accessible. Due to their flexibility and ease of access, access bonds are ideal for holding emergency cash while reducing home loan interest. If you contribute to a retirement annuity, you can park any tax refunds from SARS in your access bond, benefiting from your tax-deductible RA contributions. At the end of the tax year, you can use these funds to maximise your tax-deductible RA contributions for the next tax year. This strategy ensures efficient use of your funds, combining savings, tax benefits, and emergency liquidity.
Fixed deposit account
Fixed deposits are savings accounts linked to a specific period based on your goals. Typically, you can choose an investment term of 12, 24, or 60 months, with interest rates depending on your chosen duration. The interest rate, usually higher than that of savings or notice deposit accounts, remains fixed for the investment period. Depending on the financial institution, you can opt to receive interest monthly or have it compound at the end of the term, keeping in mind that interest earned is taxable. Once invested in a fixed deposit account, accessing your capital before the term ends may incur penalties. This method ensures your funds grow steadily while providing higher returns than regular savings accounts, albeit with less liquidity.
Money market accounts
Most banks or financial institutions offer Money Market Accounts, which are essentially savings accounts with more favourable interest rates advertised upfront. These accounts are low-risk, highly liquid investments, allowing account holders quick and easy access to their cash, with the primary risk being that your money is tied to a single bank. Money Market Accounts typically include online functionalities for easy fund transfers or withdrawals, along with ATM, debit order, and stop order capabilities. The interest earned is generally higher than on savings accounts but lower than on fixed or notice deposit accounts. Most institutions offer tiered interest rates based on the account balance. Essentially, Money Market Accounts are similar to savings accounts but offer more favourable interest rates for short- to medium-term investments.
Money market fund
Unlike a Money Market Account, a Money Market Fund is an actively managed investment product invested in a range of instruments, including promissory notes, commercial papers, and Negotiable Certificates of Deposit. Since the money in a Money Market Fund is diversified across numerous institutions, the investment risk is spread and not limited to a single bank, as with Money Market Accounts. Asset managers of Money Market Funds actively seek investment opportunities to provide higher returns, meaning investors can expect better returns compared to Money Market Accounts. However, cash held in a Money Market Fund fluctuates with market movements, with funds being accessible between one and five working days, depending on the institution. As such, Money Market Funds are not ideal for emergency capital since instant access is unlikely. Instead, these funds are more suitable for medium-term goals, such as saving for a home deposit, an overseas trip, or parking funds while making investment decisions.
Tax-free Savings Accounts
Tax-free savings accounts (TFSAs) are tax-efficient vehicles ideal for long-term savings goals. All proceeds from TFSAs—interest income, capital gains, and dividends—are exempt from tax, allowing you to enjoy full investment returns without being taxed on growth. Unlike retirement fund contributions, contributions to a TFSA are not tax-deductible. Investors can contribute a maximum of R36 000 per year and a total lifetime contribution of R500 000. If you don’t use your annual R36 000 contribution in a tax year, it cannot be rolled over to the next year and will be forfeited. This makes TFSAs an attractive option for maximizing tax-free growth over time, despite the contribution limits.
Most Tax-Free Savings Accounts (TFSAs) offer complete contribution flexibility, allowing investors to stop and start contributions at will. Contributions can be made monthly, quarterly, annually, or on an ad hoc basis, though some providers require a minimum contribution for administrative purposes. TFSAs can be structured as money market accounts, fixed-term bank accounts, unit trust investments, or JSE-listed exchange-traded funds. They can be issued by banks, long-term insurers, unit trust managers, mutual banks, or cooperative banks. Due to their long-term nature, TFSAs are excellent for saving for a child’s tertiary education. However, opening a TFSA in a child’s name uses part or all of their lifetime tax-free allowance, potentially limiting their ability to save tax-free later in life.
Preservation fund
Preservation funds are excellent for housing and preserving the proceeds of a pension or provident fund when someone is retrenched, dismissed, or resigns. Upon leaving employment, you can transfer your retirement fund capital tax-free into a preservation fund, where investment returns are also not taxed. Funds in a preservation fund are exempt from estate duty as they fall outside your estate. One significant benefit is that you are allowed one full or partial withdrawal before age 55, with the first R25 000 being tax-free, provided no prior withdrawals have been made. Any additional withdrawals are taxed according to retirement withdrawal tables. From age 55, if your pension preservation fund balance exceeds R247 500, you can withdraw up to one-third in cash, which will be taxed. The remaining two-thirds must be used to purchase a life or living annuity, tailored to your needs.
Unit trusts
Collective investments or unit trusts are transparent, well-regulated, and easy-to-understand investment vehicles suitable for various investment objectives. Regulated by the Collective Investment Schemes Control Act, unit trusts offer an economical way to invest any amount of money while benefiting from professional management and diversification. Key advantages include professional portfolio management, cost-effective diversification, relatively low transaction costs, and the ability to buy and sell at will. Capital gains tax (CGT) is triggered only when an investor sells units, with CGT levied on the difference between the purchase price and the sale price for lump-sum investments, or the average acquisition price for debit order investments. Unit trust fund managers can use sophisticated mechanisms to protect their portfolios in downward markets, strategies often beyond the skill set of small investors and, as such, professional fund managers’ expertise is highly recommended. Because of their flexibility, unit trusts are effective in building access and liquidity into one’s investment portfolio.
Have a fantastic day.
Sue
