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Different ways to make your money work for you
There are various investment products available if you are looking for an income. LUCIENNE FILD outlines the more popular options
Annuities
In return for a lump sum the life assurer guarantees to pay you a regular income of a fixed amount or increasing each year. The income you receive is determined when you buy the annuity and depends largely on prevailing interest rates and your life expectancy, or the term.
There are two types of annuities: compulsory purchased annuity (CPA) and voluntary purchased annuity (VPA).
By law a CPA must be bought with a portion of the funds you receive from a matured retirement annuity or pension fund. A VPA can be purchased by anyone wanting guaranteed income.
A CPA is paid to the annuitant for life, while a VPA can be taken for life or for a fixed term, say 10 years. These annuities are taxed differently: the income from a CPA is fully taxed; a VPA, however, is split into capital and income portions, with only the latter taxed.
The big problem of these traditional annuities is that the income dies with the annuitant, unless you take out insurance cover for the capital (at a cost) or place a five-or 10-year guarantee on the annuity.
Here's an example of the income arising from a CPA purchased from Old Mutual at this week's annuity rates: The annuitant is 60 years old and pays R200 000 into a standard annuity. The monthly income for a man is R2 498; for a woman it is lower at R2 335 (because she has a longer life expectancy).
Another type of annuity is the newer living annuity.
Your capital is invested in equities or gilts to achieve growth, and you can withdraw an income of between 5% and 20% of your investment value a year. But you also bear the risk of a capital loss on your investment as the stock and bond markets weaken.
The big selling point of this product is that when the annuitant dies, what's left of the investment goes to the heirs.
The cost you pay on all annuities varies from assurer to assurer.
Guaranteed income plans
Life assurers were the first to offer these products. They introduced the so-called "back-to-backs", where a portion of your lump sum, or a portion of each income payment, is invested in an endowment policy to provide you with a capital return (or as some would say, a higher commission charge).
Linked-product companies offer these income plans, but combine them with a direct unit trust investment. The income is still derived from a VPA bought from a life assurer. The costs can be fairly high: up to 4% initially and up to 1% a year.
Only the income portion of your receipts from these plans is taxed, the capital growth is not.
The main advantage of these products to the investor is a guaranteed income with the potential to grow capital which can be accessed at any time without penalty.
The main disadvantage is that you are locked into the interest rate at the time of buying the plan.
A unique product in this market is Rand Merchant Bank's Guaranteed Cashflow Investment. You pay a minimum lump sum of R250 000, which is invested in unit trusts with a capital guarantee. This amount is used to secure a loan from RMB, which is advanced to the investor in monthly instalments, providing a tax-efficient income.
Savings accounts
For rates currently payable on fixed accounts see the financial indicators on page 17. Senior citizens often get a higher rate.
However, Pick 'n Pay Financial Services offers very attractive rates on its cash account. On a balance of between R10 000 and R14 999 you get 14%, and on R15 000 plus you get 14.75%. These rates beat most fixed deposit rates.
Income-earning unit trust funds
The total return on your income fund consists of both income (interest) and price appreciation or depreciation in your capital.
A bond is a loan to the government at a fixed interest rate for a set term.
These funds offer investors a stable capital value, high interest (now about 15%, compared to the 9.5% average offered on a bank call account on R10 000), and withdrawals on demand.
Money market funds can be compared to bank call accounts and pay interest, not dividends.
A money fund is low risk because of the short-term nature of its investments.
There is, however, only one fund aimed at the smaller investor - the Sanlam money fund can be accessed with a R2 000 lump sum, while the other funds require R20 000 to R25 000 (and some impose a minimum balance).
You will pay costs when investing in these types of funds. Some funds have initial and annual charges, while others have only annual charges.
Rental income
Letting out property is one of the oldest methods of income creation.
If you follow this route think about having a 100% mortgage bond - you get a tax deduction for the interest paid, which reduces the tax you pay on rental income. Other expenses related to the property are tax deductible since you are incurring them in the production of income.
The problems of this asset type is keeping the property leased at all times, and the hassle factor of burst geysers and leaking toilets.
Also, do your sums carefully and make sure the property you buy is good enough to produce an inflation-beating rental income.
Participation bonds
These are syndication investments created by financial institutions to lend money to property developers. Individuals invest their money in participation bonds and are paid interest.
The minimum investment amount is usually R1 000 and the term is five years.
The interest rate (which is now between 16% and 17%) varies with the mortgage bond rate.
Inflation may lower the value of the investment, but the risk is low.
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