Industry News.

Stay up to date with all Industry related news and articles.

Financial planning for women: Are you optimising your annual tax benefits?

There is something I find extra special in August when we get to celebrate Women and wealth. I believe every woman needs to ensure she is financially independent and protected. There are a few realities we need to keep in mind when planning our financial futures as women.

  • Longevity – we live longer than men. The average woman’s life expectancy is four to six years longer than that of men in South Africa. Therefore, we not only need to plan for a longer retirement term, but we also need to keep in mind that we will take over the family wealth – and we need to be able to manage it then. Therefore, it becomes so much more imperative to ensure we are informed and involved with the household’s financial portfolio.
  • We tend to spend less time in the workforce due to raising a family.
  • In many occupations, we still earn less than our male counterparts.

Taking all of the above into account, we have a few additional challenges when securing our own financial futures, as we have to reach the same outcome with different inputs in many scenarios.

What I am quite passionate about is that women are actually quite good at investing!

Women currently make up 50% of the Fortune 500 workforce but only hold 4% of the CEO spots (26 out of 500). In 2005, Alex Haslam and Michelle Ryan completed a study entitled The Glass Cliff. They surveyed the top 100 companies on the UK’s Financial Times Stock Exchange and found that companies that had experienced volatility or poor performance in the previous five months were more likely to appoint a woman as CEO. This study was supported in 2013 when Allison Cook and Christy Glass analysed all the Fortune 500 CEO transitions over a 15-year period and found that women were more likely to be named CEO when companies were underperforming.

There is plenty of research that supports the view that having women around the table makes a significant difference.

  • Mixed-gender boards outperform all-male boards (Credit Suisse, The CS Gender 3000: women in senior management).
  • Women-led hedge funds perform inline or exceed those managed by men (KPMGWomen in Alternative Investments: A marathon not a sprint, 2014).
  • The Fortune 500 companies with the highest proportion of women performed better than the firms with the lowest (Catalyst Information Centre, 2013).

One of the most intriguing studies of 21 980 firms across 91 countries found that those that went from having no female senior executives to having 30% female representation increased their net revenue by 15%.

When it comes to saving and investing, the success stories are very much the sameBeing a financial advisor, one of the most fascinating things is that for the majority of my client base, women have become the decision-makers when it comes to the family’s investment portfolio, and in many cases, they earn more than their partners.

Women may be more conservative when it comes to taking the plunge and investing in the stock market, but multiple studies have shown that when they do invest, women not only outperform the market, but in many cases, also their male counterparts.

Warwick Business School completed a study including 2 800 UK men and women, tracking their performance over a three-year period. The men outperformed the index by 0.14%, whereas the women outperformed the index by 1.94% – a 1.8% outperformance compared to the men. The same Warwick study concluded that women also trade less frequently than men. On average, women traded nine times as opposed to 13 times for men over the three-year period. In my experience, women are better at sitting on their hands and resisting the urge to act when needed.

Therefore, it can be argued that building a resilient portfolio comes quite naturally for us. As the readers of this publication know very well, it is essential to avoid paying unnecessary taxes.

Why not ensure you are optimising your annual tax benefits when it comes to investment too?

Herewith is a three-step plan to optimise a tax-friendly portfolio:

Step 1:

Let’s start with retirement planning and probably the most under-utilised benefit. Contributions to a retirement fund are tax deductible. This can consist of a combination of a retirement annuity as well as a pension/provident fund with your company. These contributions can be deducted from your taxable income up to a maximum of 27.5% of your total remuneration or taxable income, capped at R350 000 p.a. If you exceed these contributions, you start building up a ‘pool’ of contributions referred to as your disallowed contributions.

At retirement, you will be allowed to withdraw R550 000 tax-free, provided you have not previously made withdrawals. Because you can deduct these previously disallowed deductions from the cash lump sum you withdraw at retirement, when tax is calculated, you can effectively increase the tax-free amount indefinitely.

If you can build up a substantial disallowed contribution pool, you can increase this to a few million over your working life.

Once retired, the portion of your retirement portfolio that you didn’t take as a cash lump sum gets converted to a guaranteed life annuity and/or living annuity. The income you earn from this investment is taxed on the income tax scale. But here the benefit of Section 10C of the Income Tax Act becomes applicable. Whatever portion of your disallowed contribution pool is still available can be offset against this income. Essentially, you can earn a tax-free income for years by utilising your disallowed contributions.

Step 2:

Optimise your tax-free investment. You are allowed to invest R36 000 p.a. and R500 000 in your lifetime into a tax-free product. It will take you approximately 14 years to reach the allowed limit on this investment – if you contribute at the annual maximum rate. You can still leave this portfolio to benefit from compound interest after the limit is reached.

If you only remained invested for the 14 years and made the maximum monthly contributions over this time, assuming an average return of CPI + 6% p.a., at today’s inflation rate, you’d already have a fund value of R1 228 959. Let’s assume these funds are left another 15 years to benefit from time in the market, growing at the same rate. Now your fund value has grown to R6 726 7878. This can be accessed 100% tax-free, thereby supplementing your tax-free income earned from your living annuity with income from your tax-free investment.

Step 3:

Structuring a voluntary investment for short-term needs/emergency funds (capped fund value – you want to keep the fund value low enough to ensure you will stay within your annual exclusions on all tax benefits).

With a voluntary/flexible investment, there are two main tax implications that need to be considered. An annual exemption/exclusion applies to each.

For any interest-bearing asset class (cash and bond exposure) – (this also applies to cash in the bank), an annual interest exemption applies. This is currently R23 800 p.a., and if you are over the age of 65, this becomes R34 800 p.a. Any interest earned over and above your exemptions will be taxed at your marginal rate.

Funds allocated to growth assets (equity exposure) can trigger capital gains tax (CGT). This is where you are essentially taxed on your growth earned. CGT is triggered on the disposal of an asset, e.g. the sale of a house. In the investment vehicle, it will be triggered by withdrawing or switching equities – perhaps because of a change in strategy. This is something that can be calculated and therefore known and which can be planned for. Each individual gets an annual capital gain exclusion of R40 000. (To determine the CGT, there is a formula that applies using the net capital gain, the inclusion rate of 40% and your marginal rate).

By maximising your tax benefits in a disciplined manner, you can give your investment portfolio a welcome boost and help to ensure you remain on target to reach your goals.

Article credit Financial planning for women: Are you optimising your annual tax benefits? – Moneyweb

Financial planning for women: Are you optimising your annual tax benefits? image

By |2023-08-29T11:39:55+02:00August 18th, 2023|LATEST NEWS|Comments Off on Financial planning for women: Are you optimising your annual tax benefits?

Share This Story, Choose Your Platform!

About the Author:

Go to Top