How to Benefit from High Interest Rates in SA

Make the Most of High Interest Rates

A press office feature released by Mazars Moores Rowland has given some valuable advice on how to make the most of the high interest rates. The current situation can benefit you if you do a reshuffle of your current investment portfolio, making adjustments with “an eye on tax efficiency, cost effectiveness and wealth enhancement”.

Marius Fenwick, a financial advisor with Mazars Moores Rowland says that depending on your age and current portfolio mix, the improved yields that result from higher interest rates may produce greater tax liability. The key to avoiding this is knowing where to start shuffling your portfolio.

The advisor suggests, “Take a look first at your retirement annuities and consider moving some underlying investments into a money market fund where yields are now close to 12%. The interest earned within the annuity won’t be taxed”. This doesn’t mean that all the underlying investments should go into a money market fund though.

According to Fenwick, for long-term growth you need to invest in equities, which is an asset class that has outperformed bonds and property over time. “And remember too, that once the interest rate cycle peaks and turns down, the stock market will start to run,” he adds. This approach is said to make sense particularly for living annuitants in a somewhat volatile market.

Say that you’re drawing down 8% of your annual investment value as a pension. Putting some of the underlying investment into a money market fund at a yield of about 11.5% will mean that fewer equity units within the annuity will have to be sold to produce the desired income from the drawdown of 8%.

“It may be worth considering shuffling the portfolio to ensure two years’ worth of income will be generated from an allocation to a money market fund while the rest is invested in a balanced portfolio and allowed to produce an inflation-beating real return over time,” believes Fenwick.

Of course, there will be those whose tax rates are such that an interest-bearing investment in their own individual rights will not be efficient. Individuals and trusts of a high net worth (including a 40% flat tax rate) would benefit from considering an investment in dividend income funds, which are yielding up to 9,4% tax-free after fees – and preserving capital at the same time, this according to the financial advisor.

For those who are willing to put money away for a period of 5 years, a lump sum investment in an endowment product built on an interest-bearing instrument will produce around 9.3% return, which is tax-free and guaranteed for the full term.

The pressure exerted on our currency by high interest rates may make offshore investment a sensible option. Part of your portfolio shuffle should include a look at offshore-linked funds and an additional investment outside of the country, either directly or through an asset swap.

Fenwick also stresses that while prices in the listed property sector have dipped significantly in an environment of high interest rates, property fundamentals still remain sound. This option is particularly popular as an income producer for retirees.

Those who invest in property should remember that it is a long-term investment that produces a steadily rising income and that they should continue through the period of volatility, rather than secure a loss on their investment by selling shares prematurely.

Also, given that the performance of listed property tends to track that of bonds, “the time for bonds to shine will come again” and consequently, so will the opportunity for investors to consider income funds with bond exposure.

The trick is not to try and time the market and to get your selection of asset classes right, rather than your choice of asset managers. A solid-performing and balanced portfolio is said to be the solution and it is advised to let your advisor make the calls on asset classes over the long term.

The information in this article is courtesy of Claire Densham (“Making the most of high interest rates”, Mazars Moores Rowland, Itinews, 16 May 2008).

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