With December 2019 ending off much better than the dismal last quarter of 2018, one would think that the mood going into 2020 should be a little more optimistic.

The SA Equity Market ended off the year with a solid 12.1% return, bonds 10.3%, cash 7.3% with Property lagging at just 1.9%. The lion’s share of returns last year were generated in Offshore Markets, with the S&P 500 (US Stock Market) generating a USD return of 31.5% for the year, followed by MSCI World Index at USD 28.4%, and MSCI Emerging Markets at USD 18.9%. Our view at Harbour to remain overweight the offshore markets relative to local definitely benefitted our investors, despite the ZAR strengthening by 2.8% vs the USD.

Whilst we recognise that there is a plethora of global and local economic and political factors to be aware of as we head into a new decade, we certainly don’t believe that it calls for sitting on the side lines. We continually advise our clients to control what you can – such as paying high fees and allowing unnecessary tax leakage – decide on your investment strategy given your objectives and investment time horizon, and then stay the course. Unfortunately, bad news and sensationalism sells. At Harbour we make tactical investment changes given all the information and experts we have at our disposal, and after rigorous debate at our Investment Committee Meetings. Even then, the right decision may seem difficult to commit to over the short term, however over time, the long-term trends eventually play out. Our local Index Growth clients were rewarded with a return of 16.8% last year, which translated to an annual average return of 10.4% p.a. over the last 3 years and 9.5% p.a. over the last 5 years. Clients investing for over 5 years (Index Reg 28 Growth) in the retirement space returned 13.2% for the year, with an annual average return of 8.8% p.a. over the last 3 years and 7.7% p.a. over the last 5 years. With inflation averaging just 4.1% for the year, the power of real returns compounding, was comfortably achieved.

We would like to remind you that the end of the 2020 tax year is fast approaching, and with it the deadline to make use of your annual tax incentives SARS offers to encourage South Africans to save for retirement.

Here are some key points to remember about Tax-Free Savings Accounts and Retirement Annuity contributions:

Tax-Free Savings Accounts (TFSA):

  • No income tax, dividend withholding tax or capital gains tax is applicable.
  • Annual contribution limit of R33 000 (R2 750 per month for debit order investors). You will pay a penalty of 40% on the amount you invest above the maximum.
  • Current lifetime contribution limit of R500 000.
  • Only a natural person with a valid South African Identity Document/Birth Certificate may invest.
  • Having more than 1 TFSA is allowed, but limits apply across all investments.
  • Amounts withdrawn do not create additional contribution capacity.
  • Any contributions paid by a parent on behalf of children/minors will be viewed as a donation (R100 000 annual donations tax exemption applies).
  • You can now transfer between platforms

Retirement Annuity Contributions (RA):

  • 27,5% of your gross remuneration/taxable income (whichever is higher) is tax deductible.
  • Your annual contribution is capped at R350 000.
  • The above applies to all retirement fund contributions; pension funds, provident funds and retirement annuity funds.

According to Section 10c of the Income Tax Act, whatever amount you contribute towards your retirement funds that did not rank for a deduction (i.e. that is greater than the R350 000 each year) may be offset against any income earned when you eventually start to draw an income from your living annuity in retirement, and/or any lumpsum you elect to take at retirement. Hence, you can invest more than the annual cap and allow that portion to grow tax free!

A Retirement Annuity provides a tax-efficient vehicle that can maximise the value available at retirement to convert into a living annuity. It also provides considerable estate planning benefits as any lump sums or annuities received by dependent’s on death are exempt from estate duty, capital gains tax and executor fees. However, any remaining previous contributions which did not rank for deduction, made after 1 March 2015, will be dutiable in the investor’s estate. It is also worthwhile to note that if you formally emigrate through the South African Reserve Bank and South African Revenue Service you can withdraw your RA.

Once you convert your Retirement Annuity into a Living Annuity, your contract is with a South African Insurer, and hence your money stays in SA and will need to pay out in SA. Should you need to expatriate the proceeds monthly/annually, this could be costly and an admin nightmare.

Please contact your Financial Adviser should you want to take advantage of these tax efficiencies. Our investment team works hard in constructing optimal investment solutions aimed at maximising long term capital growth and tax savings!