What to do with extra cash? Here’s what financial advisers say

In a year where unemployment reached an all-time high of 30.8%, and National Treasury the economy to have contracted by 7.8%, many investors were dipping into savings to make ends meet, notes management service provider, PPS Investments.

Even government stepped in, introducing short-term interventions through regulatory amendments to alleviate the financial pressure experienced by households during 2020.

One such temporary measure was adjusting the living annuity drawdown rate between 0.5% to 20% (usually 2.5% to 17.5%), allowing investors to access more of their retirement income.

“At the time, we noted the importance of how increasing your living annuity drawdown rate in the short-term could erode your retirement capital and its long-term viability.

“Therefore, putting any extra money you receive (whether it be from a 13th cheque or tax refund), to work for you financially will help contribute to less financial stress in the longer-term,” said PPS Investments.

Options to invest extra cash

In line with the above, PPS asked a few advisers what they would recommend investors do with any additional cash they may receive (for example, a R30 000 13th cheque).

Whilst all noted it would depend on their clients’ specific circumstances, more than 65% advised they would either utilise an RA top up or tax-free investment account:

For the RA top up, the main benefit was listed as the tax benefit it would offer, allowing investors the ability to save more towards retirement. Further it was noted that maximising the 27.5% tax deduction would allow the tax rebate to be used for other investments, like a tax-free investment.

For recommendations to utilise a tax-free investment account, it was commented that “Tax free plays a key role in retirement for clients toward reaching their goals. It is their best way forward as it allows exposure to more growth assets in the offshore realm versus restrictive RAs with Regulation 28 limitations.”

Many concurred, listing the opportunity to invest 100% offshore as a potential benefit. Further, it was noted that it offers clients with a tax-efficient savings option, while still being flexible and accessible.

Those that recommended money market was borne around the uncertainty in the markets, whereby this investment would provide greater capital protection and more accessibility.

When looking at the “Other” option, the majority of respondents recommended settling debt. The reasoning behind this, as one Adviser noted, was “Many people are indebted due to salary cuts, retrenchments and various other bad financial decisions and Covid-19.

Paying off debt sooner eases the burden on a person’s income. The less debt you have to service, the more money you should effectively have to save.”

Alongside these recommendations, many listed a combination of the options available. One adviser noted that if the client had already utilised all these options, and given the turmoil of 2020, that many deserved a care-free vacation.

Saving to retire comfortably

“With RA season upon us, we also asked advisers what percentage of their clients were on track to being able to afford to retire in financial comfort? Here, over 60% of respondents indicated that less than half of their clients were on track,” PPS Investments said.

This would align to the majority of advisers recommending that clients either top up their RA or invest tax-free with additional sources of income. As mentioned above, a temporary measure was introduced allowing investors to access more of their retirement income.

“We also asked advisers whether their clients had made use of this measure, with over 90% stating that less than 5% of their clients had, further indicating the importance of maintaining the long-term viability of your retirement capital and income,” it said.

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What to do with extra cash? Here’s what financial advisers say