Understanding product basics can help you achieve financial freedom

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By Jan van der Merwe, Head of Actuarial and Product, PSG Wealth

There are no shortcuts to achieving financial freedom. To get there, you need to live within your means and save diligently. Financial products in themselves do not pave the way to financial freedom, but rather, they provide the means to achieve it by helping you accumulate and preserve wealth.

Different products offer different benefits and features. Understanding the basics and getting the right mix for you is crucial.

Understanding your financial investment product toolkit:

Retirement annuities (RAs), preservation and employer retirement funds

These products help you save to achieve financial freedom in retirement. As such, they help you to accumulate a pool of savings before retirement, which you can then use to generate an income once you retire. They are especially useful if you start early (i.e. the time factor works in your favour) since all the returns on these products are tax exempt. An additional benefit of RAs is that they are tax deductible, subject to certain limits. Similarly, if you contribute to your employer’s pension or provident fund, you benefit from a reduction in your taxable income.

Equity-linked living annuities (ELLAs)

Living annuities aim to provide you with an ongoing income in retirement. A living annuity is also generally best suited when you have a financial adviser helping you with fund allocations and withdrawal rates on an ongoing basis. With these products it is very important that you control your annual withdrawals. Don’t withdraw too much.

Tax-free investment plans (TFIPs)

Government created tax-free savings accounts to encourage saving. TFIPs provide additional flexibility in terms of investment options and withdrawal compared to RAs and preservation funds. However, the amounts you can invest in these are subject to limits of R33 000 a year and R500 000 over your lifetime and unlike retirement funds, their contributions are not tax-deductible. TFIPs can be used to support financial freedom in retirement, but can also be used as efficient tax-free savings for other purposes, including saving for education or unforeseen events.

Endowments

Endowments can facilitate tax-efficient investment for individuals who fall into a marginal tax bracket in excess of 30%. This is because, for individuals, the tax rate on investment returns is effectively 30% when you invest in an endowment. Your ability to access endowment savings is limited within the first five years, but this should not be an issue for those who are able to set aside savings for this period.

Unit trust funds

Unit trust funds are the building blocks for many of the investment products listed above. You can also access them via retirement annuities, voluntary investment products and endowments, for example. In general, these investments provide the most flexibility in terms of contributions and withdrawal, but this comes at the price of not having the tax benefits of the other products listed above. Depending on the product option and provider you select, you may be able to access the unit trust funds of a variety of managers.

Direct shares

Knowledgeable and experienced investors may also consider investing directly in a share portfolio. You will need to ensure you understand the risks involved and how to diversify your portfolio, or need to appoint a financial adviser to do so on your behalf.

View your financial toolkit holistically

Keep in mind that there is more to attaining financial freedom than just having savings in place. Your financial plan also needs to be supported by risk cover, health products and insurance. A financial adviser can help you attain a better understanding of how the various aspects of financial health fit together and make sure your current plan is the right one for you.