Choose The Right Investment Product

Once you have made the commitment to start investing, you still have to choose a financial product to achieve your objectives. Investors have limited time to check their options and have to deal with a dramatic increase in product choices. So how do you know which product is suitable for you? The short answer is that it depends on your personal circumstances and investment objectives.

In this article, we discuss some of the main investment products and their characteristics:

· Unit Trusts

· Tax-free savings account

· Preservation funds

· Life and living annuities

A unit trust is one of the simplest ways to invest

A unit trust is a collective investment fund, whereby an investment manager collectively invests money for a range of investors. The investors in a unit trust usually have similar profiles in terms of their risk preferences and time horizons.

• A professional investment manager manages the fund.
• Your funds are accessible at any time.
• You always know how much your investment is worth.
• Unit trusts offer you the benefit to diversify your investment. You can invest in bonds, shares, property etc.

Tax-free savings accounts are long-term savings accounts

A tax-free savings account allows you to save up to R33 000 a year and up to a maximum of R500 000 in your lifetime. By taking advantage of a tax-free savings account, you can save for most of your life’s goals including your children’s education.

• The maximum amount you can put into your account per tax year is currently R 33 000, with a lifetime maximum of R 500 000.
• You do not pay tax on dividends, capital gains and interest or other income.
• You can start a tax-free savings account through a monthly debit order; or contribute a single lump sum.

The following products are your investment options both while saving for retirement and at retirement:

On leaving an employer’s fund, most members choose to transfer their benefit to a preservation fund

Nowadays, it is quite common for individuals to change employers over the course of their working lives. If an employee is dismissed, retrenched or resigns, they can transfer their pension or provident fund benefit to a preservation fund. A preservation fund is an investment vehicle designed to preserve your retirement benefit until retirement age. If you decide to transfer your fund value to a preservation fund, you do not pay any tax on the transfer. It not only preserves your tax status, but generally also allows you one withdrawal before retirement.

The growth in your investment comes from the underlying unit trust fund (s) that you select. You must select a range of funds that are appropriate for your future retirement needs.

A retirement annuity is a tax-efficient way to save for retirement

If you are not a member of your employer retirement fund, you are self-employed or you need to increase your existing retirement savings, you can open a retirement annuity account. A retirement annuity is a personal retirement plan, which enables you to save tax-efficiently for retirement.

• You can start a retirement annuity account through a monthly debit order; or contribute a single lump sum.
• Your contributions to a retirement annuity are tax deductible up to a certain limit.
• You do not pay tax on dividends, capital gains and interest or other income.
• You cannot retire from the fund before the age of 55.
• It is suitable to employees who do not have access to a pension or provident fund with their employer.

A life or guaranteed annuity pays you a stream of income for the rest of your life

With a life annuity, you give a lump sum of money (remaining two-thirds from your retirement fund) to a financial institution, usually a life insurance company, and in return, you receive a set amount in monthly payments for the rest of your life. You should view a guaranteed annuity as an insurance policy against living too long.

Life expectancy is an important factor in a guaranteed annuity because it is how the life insurance company determines how long it will expect to have to pay you. The older you are and the shorter your life expectancy, the higher the income you are likely to receive and the other way around. The advantage of the life annuity is that you cannot outlive your benefits, since they keep coming until you die.

The main disadvantage of the life annuity is that you do not have the option of naming a beneficiary on your annuity, so the payments stop when you die. However, for many people who do not like to take risks with investments, the guaranteed return on a life annuity is a safe and comfortable choice.

The modern alternative to the life annuity is a living annuity, sometimes also known as a flexible annuity

In a living annuity instead of a fixed income paid on your lump sum, you can choose the level of income you receive within the legal limits.

A major disadvantage of a living annuity is that you may outlive your capital. This usually happens when an investor’s income drawdown rate is greater than the underlying unit trust fund’s return.

• You can choose an income level of between 2.5% and a maximum of 17.5%.
• You can review and change your income every year.
• Your money continues to grow since you select unit trust funds as your underlying investments.
• Any money left in your living annuity when you die is left to your beneficiaries and is paid immediately

It makes sense to consult a professional financial adviser

We have seen that choosing an appropriate financial product is near impossible for an individual investor. Investing, especially without the help of a financial adviser nowadays is not recommended, unless you have the skill and knowledge to do it yourself. In fact, buying a financial product is probably one of the most complex, challenging things we do, given the growing diversity of products and the greater amounts of information investors are expected to know.