High Income after Tax Investments
This summary covers income generating investments with a low risk of capital loss.
It compares the available options from Bank deposits, money market funds, bonds other low risk investments and guaranteed products.
Importantly the focus is on after-tax income.
Interest Rates
We feel interest rates are after the middle of the cycle, IN SA there have been 6 interest rate cuts for a total of 1.5%, however the frequency of rate cuts and expectations for further cuts are declining. This is reflected in a flatter yield curve and a 2% reduction in medium-term rates from their peak in 2022.
We’ve highlighted that the rapid decline in rates has changed the attractiveness of this asset class. From record levels of bond exposure in our portfolios, we have begun switching into other assets.
This table compares the available rates across a selection of high yield investments:
Guaranteed annuities still offer the best return on an after-tax basis (assuming a marginal tax rate of more than 26%), particularly considering the risk.
Ensure that you use an independent broker to shop around for the best yield available, the difference between the highest yield (5.74%) and the lowest yield (*4.97%) implies 17.2% more growth and 12.0% more income in your pocket.
The table below provides a comparison of the other “fixed interest” options. Our intention is to compare
them on an after-tax basis. Guaranteed Annuities have provided the best return for clients with high tax rates over a 5-year period, but the gap is closer than normal, particularly for the major issuers. Investors with lower marginal tax rates and those with a shorter time horizon may prefer RSA Retail bonds or Income Funds.
Remember that interest rates “price-in” expected increases, so the 5-year yield already reflects the expectation for interest rate increases/decreases. This means that longer-term yields will not necessarily rise/fall on new changes to the repo rate, only unexpected changes could have a material impact.
A sinking fund will reduce the tax liability to 30%, this makes the after-tax yield significantly more attractive.
It’s worth noting that the Guaranteed after-tax yield on the RMB 3-5 Year Structured Note is 4.05% pa. This product also pays 50% of the upside on a Global Index plus the currency movement, uncapped.
The difference of about 2%-3% per annum is relatively small for the opportunity to participate in equity market upside. These notes are particularly interesting for clients that need to increase their offshore exposure.
Global Income
In a high inflation environment, it is vitally important to obtain and maximise the yield on your offshore cash holdings. We find many clients who hold cash on call are unaware that interest is not being paid.
Below are a few alternatives to ensure that a good yield is obtained.
This table provides an overview of the yield available around the world, the weightings are indicative and it may not be suitable for clients to invest in all of these instruments.
If you would like any more information on the investments in this summary, please contact us.
Regards,
Guy Algeo
