Have a proper investment plan

Prenassen asks: I have a property that is paid off worth R600000. My current retirement annuity contributions is R1 600pm with a current value of R20000.

I cashed in my pension from my previous employer to pay off the bond on the property and I have recently bought another property valued at R800000.

I am thinking about selling the property that is paid off and investing around R400000 of it into my current retirement savings to take advantage of compounding interest.

Maya replies: I imagine this question comes from the article I wrote on whether to pay off your bond or invest in a retirement fund.

The problem here is that you have already cashed in your pension so you have paid the tax on it and if you invest that money back into a retirement annuity you will not get the tax benefit as it will exceed 15% of your income.

Have a plan
What you need to do at this stage is to sit down and work out your financial plan over the next ten years so that you can ensure you are making the right decisions.

Being aged 30 you are at a perfect time to start a proper financial strategy that will build you wealth over the next 20 years. Good financial decisions made today will give you choices when you are in your 50s.

Part of that strategy will be looking at your current lifestyle and whether you have more opportunities to build wealth by delaying consumption today.

Because you have lost your tax advantage by cashing in, you are now making a call between investing in property or equities (through unit trusts). That is a difficult one to answer without a crystal ball but if you have a tenant that is paying your mortgage for you and will pay it off over next 15 years or so, then that property can be a very useful retirement asset as it will pay you an income in retirement.

However to be tax efficient you should have the mortgage over the property you are renting out not your home because you can deduct the interest payments from your rental income before paying tax.

Also at this stage property prices are so weak it may not be the best time to sell. As long as you have a tenant and are not in any financial difficulty in paying off the property, it doesn’t make sense to rush off and sell it.

Retirement savings
Are you using your tax advantage and saving 15% of your income into retirement savings vehicles? If not can you divert some of the money you were paying on your mortgage into retirement savings?

Whenever a person cashes in their retirement fund to settle their mortgage they MUST replenish the retirement fund by switching the bond repayments into retirement contributions.

Your financial plan needs to be made up of different asset classes. You have your property, so start focusing on your tax-free retirement fund as well as a discretionary investment in unit trusts. You can possibly use the net income from the property to build up the other assets.

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