In today's episode, Warren Ingram delves into the essentials of starting a financial journey for young family members, navigating through options like endowments, retirement annuities, and tax-free savings accounts. We explore the strategic timing and benefits of offshore investments, including phased investments for long-term growth and retirement planning.
Questions/ Topics:
"I'm thinking of investing money offshore, like taking money directly offshore and investing it there for the long term in equities. The reason that I want to do that is to be able to have some money to be able to purchase a house in cash when I retire, which is going to be in about 20 years. I'm not going to need this money for anything else. Would you say that's a good idea or is there something else that you'd advise? Thank you."
"I'm lucky enough to be an aunt with a niece and nephew and I'd like to invest roughly about 250 Rand each a month for them. Everything I've looked at online shows that only if you're the guardian or the parent you can open up an investment account. The thing is I'd like to be able to have control over it, receive statements every month, see how things are growing, to see if I need to change anything about it. Let me know. Is the only option to set something up through the parents?"
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Speaker 1:
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Speaker 2:
How's it going? I'm lucky enough to be an aunt to it, with a niece and nephew, and I'd like to invest roughly about 250 round each a month for them. I've looked online and it shows that only if you're the guardian or the parent you can open up an investment account. The thing is, I'd like to be able to have control over it, receive statements every month, see how things are growing, see if I need to change anything about it. Let me know. Is the only option to set something up through the?
Speaker 3:
parents. Thanks so much for your question, aunt. I didn't get your name in the recording so I'm just going to call you auntie for now. What a nice idea to set up an investment for your niece and nephew. I think it's amazing to do that. The typical answer I would give people who have young children is open up a tax-free savings account for the young kids. If you can try and maximize the amount of money you can put in every year, which works out to 36,000 a year, if you did a debit order, it would be 3,000 a month. So for you, if you wanted to allocate 250 a month, 250 per month, then certainly maybe doing a deal with the parents would be nice from the point of view that you could do top up of a debit order if they couldn't do that money. But I know you said that you want control and certainly if that's the case, then you might need to think a little bit out the box, because if you don't want to involve the parents and you want to exercise control over the money, then I think it makes more sense to do something in your own name and then allocate that money to your niece and nephew at a later stage when you are ready and you feel that they are ready, and so typically the big concern around doing an investment in your own name but for somebody else will be tax. If, let's just say, you started an exchange-traded fund or a unit trust for one for your niece and one for your nephew then it's in your own name. What will happen is when you decide to give them the money, you would then end up having to actually sell the investment, which would cost you tax, and then you would give them the money, and if it was more than 100,000 grand in a year, then you would end up paying donations tax as well. So control is one thing, but just remember that tax is a big issue as well, and so I think in the world of investing, there's never kind of one answer to all questions. I think if control is really important to you, then just be careful that you don't get a massive amount of money that you leave them. If it's gonna be 250 grand a month, then just watch out for donations tax one day and be careful of that.
Speaker 3:
So one option, for example, is you could start an endowment. Now, in the old days, endowments were sold by insurance salesmen and what they did was they charged lots of big upfront fees. The endowments were incredibly expensive and investors were told that it was a really tax efficient investment. But actually when they looked at their investment after 10 or 20 years, they had almost no growth, and that was because of the fees, and so tax wasn't really a big consideration. But for you, what you could do is go and use a unit trust platform, for example, and they won't charge you an extra fee for the endowment, they'll just charge you the generic administration fee for running a platform.
Speaker 3:
And then what you do is you start an endowment, and if that endowment goes beyond five years and that's important then what will happen is the money that you take out of that endowment one day will be tax free, so you won't pay a tax on the capital gains, and you can then give that money to your niece and nephew. And if you do one endowment or two, you can decide. But if you did one endowment, you could make each of them a joint beneficiary. In other words, you could say, yes, it's my money, I'm in control, but if I die, then 50% of the money goes to my niece and 50% of the money goes to my nephew, and that's just on that endowment. It's not part of your will where you're now saying all of your assets go to your niece and nephew. So certainly that's an option.
Speaker 3:
And if the amount gets above 100,000 rand and what you could do is draw half of the money or a portion of the money in one tax year and then give them each 50,000 rand and then wait to the next tax year and then do another 50,000 rand and so on and so on, so that you don't pay donations tax. So there is a way to do this fairly, tax efficiently, and I think if control is the big issue, that's probably the best idea I can think of. The other one some people talk about is starting a retirement annuity for each child and then giving them the money. And certainly with the way that retirement reforms have gone, it means that they will be able to access a little bit of the money every year before their retire. But actually they would be forced to access most of the money only after their turn 55. And I think that kind of access to money is a big question you need to decide for yourself. For me, first choice will always be tax-free savings account. Second choice would be the endowment. I hope that helps.
Speaker 4:
Hi there, chris, here, quick question please for your podcast. I'm thinking of investing money offshore, like taking money directly offshore and investing it there for the long term in equities. The reason that I want to do that is to be able to have some money to be able to purchase a house in cash when I retire, which is going to be in about 20 years. I'm not going to need this money for anything else. Would you say that's a good idea, or is there something else that you advise? Thank you.
Speaker 3:
Hi, chris, thank you so much for your question. I think offshore investing is a very sensible thing to do for all investors around the world, and South Africa in particular. Because our stock market is such a small market now. We've got a small number of listed shares. The value of the JSE is quite small. So if you want exposure to big tech companies or big pharmaceutical businesses or big motor manufacturers whatever is built around the world or used around the world that's not made in South Africa, then you need to invest your money at least a portion of your money overseas, to get exposure to those kinds of investments and those kinds of companies.
Speaker 3:
I think it makes a lot of sense for all investors to have a portion of their assets overseas. To give you an idea, I don't think that it should be all or nothing. In other words, I don't think you should have all your money overseas or all your money in South Africa. I think you should have a spread of assets. So for someone who is in a financial position where you think you might retire with just enough money one day, chris, then I think you should have about 25% of your assets offshore If you're going to retire with a bit more money. In other words, you think you might be able to leave some money to the next generation, then you should increase your offshore allocation to 50%. And if you think you're really going to have a lot of money left over for maybe two generations after you so potentially your children and your grandchildren then I think your offshore allocation should go up to 75%.
Speaker 3:
The reason for that mix is actually the decision to allocate money overseas is about diversification of geography and then diversification over time. When you're investing money overseas and you allocate a portion for grandchildren let's say you're in your 30s and you want to be able to make sure that your grandchildren might not even be born yet, you might not even have kids yet. If you've got that kind of a time horizon, then you need to invest so that you don't know what, to make sure that you can get growth, because we don't know what's going to happen going forward in 10 years time Forget about 50 or 75 years time and potentially for grandchildren they're not even born yet. You might be at a time horizon of 50 to 70 years. So I think when you've got such a long time horizon, then you would allocate a large portion of money to global markets because we don't know, in 20 years from now what will be the biggest economy in the world, what will be the biggest stock market, where will the biggest companies be listed? The fact that it's been America for pretty much the last 100 years, or 50 years at least, doesn't mean that that's what's going to happen into the future.
Speaker 3:
So I think offshore diversification makes a lot of sense, but just make sure that you're doing it according to a fixed structure and a fixed strategy. And then just making sure, chris, that when you want to get that money back again, that you make sure that you don't just do it all in one shot. So if you decide that you want to buy a house one day with a portion of your overseas money, don't plan to bring it all back on the 1st of January in 2042. Make sure that you do it over, let's say, a two-year period because, again, you want to kind of limit the risks of stock markets falling, of currencies being volatile, all of those things. So phasing your money into investments makes sense and phasing your money out of investments makes equal sense.
Speaker 3:
And then, lastly, if you're going to invest overseas, my suggestion is not to go and buy one or two shares. I would go and buy a global index, for example. I'm not sure that I would want to go and become a stock picker for a long-term investment, like you're looking at, for 20 years. I think buying an index makes a lot of sense. I hope that helps and thanks for your questions.
Speaker 1:
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