The poor savings culture in South Africa, and a lack of concern about creating personal wealth building for the future, can be reversed if people tackle the complexities of saving for the future and are prepared to monitor their investments effectively, says professional services firm Deloitte.
Dinesh Munu, Partner and Head of Funds and Asset Management Audit at the firm, believes South Africans who are faced with an escalating cost of living, rising medical costs and high levels of personal debt do not use the encouragement offered by significant tax incentives to begin investing.
"It is essential, before setting an investment strategy, to realise that there is no ‘one-size-fits-all' approach when it comes to building personal financial wealth. There are several factors that people should consider," says Munu. These include:
* Considering personal circumstances and preferences;
* Obtaining professional investment advice and considering the types of wealth-creation vehicles, tax and estate planning, and the relationship between risk and return;
* Having appropriate and adequate insurance cover in place to protect the investor and his or her dependants in case of financial loss that could occur through death, disability or illness; and
* The costs of investing.
"People should think about how long they wish to invest for. Keeping savings liquid or invested in liquid assets is advisable if investments need to be made for a shorter period. Equity type investments, on the other hand, are more appropriate for a long-term investment strategy," says Munu.
Investors with very limited resources need to be more prudent when choosing investments. It is also wise to diversify investments and spread resources across equities, property, cash resources and foreign assets.
"The expected growth of the investments that are chosen should ideally match an individual's investment needs. It is important to understand that, in order to create wealth, the return earned on one's investments needs to exceed inflation," says Munu.
Furthermore, the performance of investments needs to be regularly monitored, and changes need to be made as required to make sure that maximum returns are earned within the risk parameters. When making long-term decisions on savings, the tax, regulatory and foreign exchange implications that could be applicable to the investment vehicles that are chosen should be considered.
The most common taxes applicable to wealth generation are Capital Gains Tax, Income Tax, tax on dividends and estate duty.
The proposed change to the allowable deductions for retirement fund contributions to a total of 27.5% of remuneration or taxable income shows that the tax authorities are encouraging savings.
Some other possible regulatory changes that could encourage savings are:
* Restricting access to retirement savings on the date of retirement – avoiding current trends to cash-in pension fund money when changing employment.
* Legislative changes to ensure limited compulsory investment in infrastructure and power-generation projects. This would create employment, creating wealth for the country and individuals alike.
* Raising the tax-free limit on interest earned from banks and other investments.
"The earlier one starts with a savings programme, the better the results. Getting professional advice and starting an investment portfolio, even if action is taken later in life, can still make all the difference to a person's future," says Munu.