An Increase in Wuhan Coronavirus Deaths Pushes the Rand to R15/dollar

On Friday, 7thFebruary, the rand hit R15 against the dollar as emerging markets took a hit on news that the death toll connected to the Wuhan coronavirus is increasing. 

As the death toll reached 636 in China, with the majority of deaths being reported in the Hubei province, an index of emerging market equities fell 0.6%, according to Reuters.

In the previous session, data showed that in January business confidence in the country fell and now the rand has slid even further. This year we have experienced the worst power cuts in a decade and a jerky economic growth that has led to the currency lagging its emerging market peers. 

According to the Guardian, the coronavirus infections within China are at 31 161 and global infections have passed 280 in 28 countries. 

After the Department of Health in KwaZulu-Natal said that it was testing two people for the Wuhan coronavirus, South Africa has been on high alert. The patients, however, have been given the all clear, but there is a fear that it will only be a matter of time before we have our first case. 

China’s economic growth has also been cut by 0.75 percentage points by S&P saying that the country’s economy will take a big hit because of the coronavirus and the rest of the world will feel it. 

The Rand is at Risk

According to a recent Reuters poll, the rand and other emerging markets are at risk of weakening in February if the Wuhan coronavirus spreads. According to Annabel Bishop, chief economist at Investec, South Africa is more likely to receive a downgrade from Moody’s if the rand approaches and exceeds R16/dollar this quarter. The currency has already reached a low base due to the virus impact on risky assets. 

At the end of next month, South Africa has a credit review due. If Moody’s lowers its rating to junk, then investors will automatically sell its bonds. 

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Tax Free Savings Account Vs Retirement Annuity Fund

We all know that we have to save and the benefits thereof as well as knowing the benefits that are offered by tax free savings account (TFSA) and a retirement annuity fund (RA). However, do you know which one is the best savings vehicle? Certified financial planner at Alexander Forbes Financial Planning Consultants, Jaco Prinsloo sheds some light on these saving types, so you can make the best choice. 

The Differences 

The TFSA was introduced by the National Treasury as a way to get South Africans to save for future expenses and long term investment goals with flexibility, affordability and simplicity in mind. 

RA’s were created for those that are facing a retirement shortfall like self-employed individuals, so that they can save in their personal capacity for retirement specifically.

The Benefit with Tax

TFSA’s and RA’s give you the ability to grow your savings tax-free, which means that there is no interest, income or capital gains tax or dividend to pay on the investment growth. However, the tax implications on contributions and withdrawals are different. 

How Contributions and Withdrawals Work

A TFSA allows you to start saving from just R250 per month or you can choose to make a lump sum payment each tax year of R33 000. A TFSA has a lifetime limit of R500 000 and if you exceed the limits then you will be taxed at 40%. The contributions don’t offer a tax saving, but you can withdraw your savings as a monthly income tax-free or as a lump sum. TFSA’s don’t have a minimum investment period, but the penalty for withdrawing funds is that these withdraw funds cannot be replaced and your annual and lifetime limits are permanently reduced. 

With an RA, you can reduce your income tax legally through your contributions. There is a maximum on your taxable income of up to 27.5% or R350 000 per tax year. The tax deduction is then a tax saving, which is like a reward for making arrangements for your retirement. There are no contribution limits and any non-deductible contributions are rolled over and deducted in the following tax year. You can retire at 55 years and have your RA savings converted into an income, which is an annuity. If the value is more than R247 500 then two thirds will need to be converted. The income gained from this will then be subjected to income tax. The remaining third can be taken as a lump sum. You will receive R500 000 tax free once in your life and the balance is taxed at between 18-36%. 

What Can You Invest in?

TFSA and RA’s have access to multiple asset classes, including bonds, local and global cash, shares and property. 

RA’s are protected and regulated by the Pensions Fund Act that includes Regulation 28 that imposes certain limits on how much and where you can invest. 

TFSA’s, on the other hand, are not subject to Regulation 28, which means that you can invest as much as you want and where you want within the limits set by any asset class. 

Creditors and Estate Duty

Your savings in an RA are protected from creditors and estate duty. Your nominated beneficiaries will receive your savings once the trustees of the fund have approved. 

With a TFSA, you will not receive any protection against creditors. If it is invested in a life policy then the savings are paid to your nominated beneficiaries, otherwise, it will be paid to your estate. If your estate is worth more than R3.5 million, then you may pay estate duty.

So Which One is Better?

An RA might be the better option if you are fine with Regulation 28, can afford to have your money invested until 55 years of age and are paying tax on your income due to the tax saving on the contributions you receive. 

A TFSA might be best if you want to invest in a specific asset and want to access your funds as they offer flexibility. 

However, a combination of both will reduce your income tax whilst saving and provides you with tax free withdrawals on withdraws.

You can then avoid the restrictions of Regulation 28 with a TFSA flexible asset allocation that you can use, based on your investment goals, to increase your specific asset class exposure.

TFSA and RA’s offer unique benefits and both should be included in your overall investment strategy. The choice will come down to your circumstances and your goals. 

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