For all the flack they’ve been getting, there’s no easier way to reduce your tax liability than pension fund contributions. In this week’s episode of The Fat Wallet Show, we help Megan correct an assumption about her tax savings on retirement annuity contributions. We use the opportunity to talk about Offshore investments refer to investments made in countries other than the one you live in. These investments allow you to take advantage of a better investment environment, different tax regulations, or simply to protect your portfolio from risks affecting your local investments. Here are some posts that discuss offshore investing: ETF: How to buy the whole world Podcast: Offshore ETFs More allocation and prescribed An asset is something you own that will earn you money in the future. In the real world assets are your brain, buildings and businesses. In the world of finance, assets are shares, bonds, cash, gold and other financial instruments and investments. Different types of assets (different asset classes) behave differently in different market conditions. This is discussed in more.
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The bleeped show is below.
Win of the week: Megan
I listened to your “To RA or Not” episode today, and one of the questions (about RA contributions vs paying off a It helps to think of bonds as an IOU from the government. When you buy a fixed interest rate bond or bond ETF, you are lending money to the government in return for a fixed interest rate (also called a coupon) over time. You can invest in local and foreign government bonds. This post covers the subject in more detail: ETF:) reminded me of a dilemma I’ve been wondering about for a while.
I’m 25 and working as a junior engineer. My marginal tax rate is at 26%. I’m currently putting R3000/month into my Tax Free Savings Account. A fully tax-free investment account is limited (as at 2021) to R36,000 a year and R500,000 lifetime limit. Only certain ETFs are eligible for this product. These posts are a good place to start: Video: Everything ETFs and tax-free OUTstanding money: Saving tax free Wealthy Maths: The impact of tax-free investing Podcast: Your first tax-free investment More (Satrix MSCI World ETF with Easy Equities) and R2000/month into a Sygnia RA with decent fees. I save R1000/month in a TymeBank goalsaver for holidays. After that I can’t really afford more savings at the moment, which means I’m not adding anything to my long-term discretionary investments. (I have an emergency fund and enough short-term investments for my needs and goals.)
My question is this:
1) The This is a Pension Funds Act directive that aims to ensure your retirement funds are adequately diversified and not invested in excessively risky portfolios. To be Regulation 28 compliant, retirement annuity (RA) or pension fund providers must invest a client’s retirement savings across different asset classes: equities, foreign assets, property and cash up to the maximum allowable amount. You can find More requirement on the RA which limits global Diversification is a way to manage risk when we invest. It means we spread our financial interests across a number of investments. We can diversify by asset class, by having an emergency fund, share investments and property. We can diversify within an asset class, for example by investing in more than one company or an ETF that offers broad-market exposure. More,
2) My low tax bracket, and
3) The fact that Rand devalues around 4% per year to the dollar,
is the RA really worth it?
Putting money into an RA saves me 26% now. But what if I were, instead, to put that R2000 into a discretionary In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. 'Saving' is not the same More (e.g. MSCI World ETF)? If the MSCI World outperforms the local 70% of my RA by 4% a year (which seems likely imo), then surely the discretionary fund would be “outperforming” the RA in the long term?
For arguments’ sake, with the assumption that global returns outperform Rand returns by 4%, then after 10 years, R2000 in the RA + 26% (assuming I could magically reinvest the tax return instantly) would be worth
(2520 x 0.3 x 1.04^10) + (2520 x 0.7) = R2883.
While R2000 in the discretionary global ETF would be worth:
(2000 x 1.04^10) = R2960.
(I mean this in relative terms, I don’t really expect 0%).
This difference would only get greater over time due to Think of compounding as money babies. When you save or invest, you earn interest or dividends on your money. When you put the interest of dividends back into your account, the next time you earn income, you'll earn on the money you originally put in, as well as the money you earned from that money. Compounding is the easiest way More.
The other thing is that the RA money will all get taxed in future. And that the RA fees, although low, are higher than the discretionary fees.
So while I fully understand the tax benefits of an RA for people earning at 45%, I’m not as convinced for those of us in some of the lower brackets. What do you think? Is my assumption wrong about global markets showing better returns? Is it normal to feel this uncertain about putting so many eggs in the SA basket, or am I being silly? Is an RA worth it for me now, and if not, when does it become worth it?
The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to firstname.lastname@example.org.