South African investors are hoarding record amounts in bank accounts. Household deposits totalled R1.67tn at the end of May, which is significantly higher than the long-term average.
We believe two factors are at play:
- High interest rates making returns from cash more attractive
- A lack of confidence from South African investors making them reluctant to invest money in the market
However, over the long term, cash in the bank leads to sub-optimal outcomes for clients. This presents a huge opportunity for advisors to bring these assets into their advice net, enhancing revenue generation for the advisor practice whilst improving outcomes for clients.
The problem with cash in the bank
While investors are enjoying higher returns from cash, their tax liabilities have increased, Paying this tax across to SARS has been difficult for many clients to stomach. Of bigger concern is that cash in the bank is frozen on death which can leave family members high and dry while the estate is being wound up.
| Tax efficiency? | Liquid on death? | Free of executors’ fees? |
|---|---|---|
| Taxed in own hands (up to 45% income tax) | Frozen in estate | Fall under control of executor |
| Investor responsible for payment to SARS | Delays for family members in accessing funds | Executors’ fees applicable |
While these issues create challenges for any investor with excess cash in the bank, they are particularly pertinent for clients who are elderly or in poor health. Clients in this position should consider strategies that can create a cost-and time-efficient transfer of wealth on their death.
The solution – Ninety One Life Portfolio
The Ninety One Life Portfolio helps to address these challenges. Interest is taxed at 30% , rather than up to 45% in the client’s own hands. This helps to maximise growth on the investment. Importantly, the life company pays the tax across to SARS, meaning it does not need to be included in the client’s tax return.
| Tax efficiency? | Liquid on death? | Free of executors’ fees? |
|---|---|---|
| Income taxed at 30% | Fully liquid on death | Succession by beneficiary nomination |
| Life company pays tax to SARS | Provides unrestricted access to funds | No executors’ fees |
These benefits maximise growth while the investor is alive, and on death, preserves value through the avoidance of executors’ fees. Beneficiary nominations ensure efficiency of succession as beneficiaries have quick and unrestricted access to funds on death.
The outcome – Money Market via Ninety One Life Portfolio
Clients with excess cash in the bank do not need to materially increase their risk to generate better outcomes. The table illustrates the benefit of holding the Ninety One Money Market Fund via the Life Portfolio product, net of fees and taxes.*
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Cash (repo rate) | R10,453,750 | R10,928,089 | R11,423,951 | R11,942,313 | R12,484,195 |
| Ninety One Money Market (Policy) | R10,593,250 | R11,221,695 | R11,887,422 | R12,592,643 | R13,339,701 |
Based on current yields, the improvement net of fees and taxes equates to an extra 1.33% p.a. without having to increase risk. Besides benefiting clients, this provides an opportunity for advisors to grow their book and increase revenue. For more information about the product features and benefits, please speak to your Ninety One Investment Platform Sales Manager.
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* Illustration based on R10m invested. Cash investment based on repo rate of 8.25%. Money Market return based on gross yield of 9.09% as at 15 August 2023 and adjusted to reflect asset management fees of 0.25%, platform fee of 0.22% and an advice fee of 0.25%. 45% tax applied to cash example and 30% to Money Market illustration. It is assumed that annual interest income exemptions have already been used. For illustrative purposes only. Yields are subject to change as interest rates change, which will affect the outcome.
