Receiving the same tax treatment
Changes to retirement benefits for provident fund members, initially meant to come in five years ago and now scheduled for next March, will see tax uniformity for all who contribute towards retirement. These changes, in terms of the Taxation Laws Amendment Act, will also encourage greater savings, something South Africa desperately needs as it seeks to crawl its way out of an economic hole.
Dolana Conco, regional executive – consulting at Alexander Forbes, says: “One of the aims of retirement reform is to create a uniform retirement fund system for all types of retirement savings vehicles, such as pension, provident and retirement annuity funds. This will allow all members to receive the same tax treatment of the money contributed and how benefits can be paid at retirement.”
Alexander Forbes Member Watch analysis shows that about 50% of members retire with less than one-fifth of their final salary to live on in retirement.
Many reforms have been implemented over the last few years, but it has been a long journey for this next vital step. “The changes are beneficial for most retirement fund members and encourage greater savings for retirement and address issues in the retirement system,” remarks Conco.
Conco adds, “Currently provident fund members can take their retirement benefit as a full cash lump sum and do not have to buy a pension (annuity) from a registered insurer when they retire. However, pension fund members must use at least two-thirds of their retirement benefit to buy a pension, unless the total benefit is less than R247 500.”
How retirement reform affects members
From 1 March 2021, retirement benefits from provident funds will be treated in the same way as pension funds for the part of the benefit based on contributions. Conco explains that the changes for provident fund members are:
1. Provident funds will have the same annuitisation rules as pension funds.
This means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is R247 500 or less.
2. Vested rights will apply. Retirement savings will be ring-fenced as follows before the new legislation takes effect:
- Any provident fundbalance saved before 1 March 2021 plus the future growth on this until retirement won’t be affected and can be taken in cash on retirement.
- Members who are 55 years or olderon 1 March 2021 will not be affected by this change at all if they stay a member of the same provident fund (or provident preservation fund, as proposed in the draft Taxation Laws Amendment Bill until retirement. This means that the retirement benefit will be treated in the same way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require them to buy a pension with two-thirds of their retirement benefit.
The benefit of this change is that funds will be able to transfer members’ savings tax efficiently.
Conco suggests that employers who have multiple retirement funds consider consolidating these funds, as pension funds, provident funds and retirement annuity funds will be harmonised in the tax treatment of contributions and the retirements benefits at the time of retirement. Consolidation requires many other factors to be considered. One such example is understanding the implications on vested rights when transferring provident fund members who are 55 or older on 1 March 2021. Other factors include:
- the size of the funds
- potential cost savings or cost implications
- Section 14 transfer requirements
- liquidation requirements of the transferor fund and so on
“The changes to ensure further harmonisation between pension funds, provident funds and retirement annuity funds take effect on 1 March 2021. It is important for trustees to start implementing project plans to get ready for these changes. Amendments to rules, communication to members, and fund consolidation will be some of the matters to consider,” concludes Conco.
HOW ALGORITHMS CAN BOOST YOUR TRADING PROFITS
Gabriele Musella is CEO and co-founder of Coinrule
Trading, whether for cryptocurrencies or stocks, is about buying and selling at the right time in order to increase your overall funds and make a profit.
There are over 14 million day traders[i] around the world. However, to make money when trading, you have to invest a lot of time.
It requires spotting patterns and identifying opportunities. It is this time requirement that has been a key driver in the development of algorithms to help when trading.
Day trading is when someone who buys and subsequently sells financial instruments like stocks, cryptocurrencies or futures within the same trading day.
Low barriers to entry and the ability to trade online make it tantalising for this age group. But, is it profitable?
Profit or Loss?
It’s estimated that 95% of day traders[iv] lose money.
There are lots of reasons why; with under-preparation[v] being most often cited as the main reason. People start too quickly and don’t have a strategy they stick to.
So, where do trading algorithms fit into this?
Trading With Algorithms
Put very simply, a trading algorithm or strategy is a set of rules that, together, define when trades should take place. The algorithm helps a cryptocurrency trader to either buy, or sell, at the right time. This enables them either to minimise losses and take profits.
The algorithm can be tested on historical data, on different and past market conditions, giving you scenarios that it will help deliver good returns when used on the current markets.
These rules can then be executed by trading bots to make the trades at the right time.
Why Use a Trading Algorithm?
There are three main reasons for using a trading algorithm:
The time needed to analyse the available market data and spot the right moment to trade is considerable. Most traders simply don’t have this time available, so a trading algorithm can help.
- Too much data
There is simply too much data available that needs to be analysed to make profitable trades. For example, with over 7,000 cryptocurrencies on the market, it is impossible to know everything about all of them without automated assistance.
- It’s a steep learning curve
What I see is that most hobby investors have about one or two hours a week available to them to learn ‘how’ to trade, ‘what’ to trade and ‘when’ to trade. This simply isn’t enough. Trading algorithms are constantly learning because of their ability to consume and analyse large amounts of market data.
What Are The Alternatives?
One alternative to using a trading algorithm would be to program a script. Trading scripts enable automatic trading, but they can only follow one strategy, are difficult to code and struggle to react to market changes quickly.
- Copying the professionals
Copy trading is where professional traders allow people to copy the trades they do. They get paid to allow public access to their trading activities. If the right traders are chosen, this can be a highly successful alternative, but the fees can be very high, up to 30% of the profit.
- Do it yourself
If you have the time – a lot – and the analytical skills, you may not need a trading algorithm and you can go back to trading manually.
How to Use a Trading Algorithm
Choose a supplier
There are plenty of suppliers of algorithm software. Most are for large firms, however companies like Coinrule aim to help hobby investors, occasional investors and professional traders, to have easy access to trading algorithms. Coinrule’s customers are trading anything from $150 a month upwards, to $millions per month.
You can sign up for free or choose which of the three pricing plans work best for you, based on your trading budget, template strategies and required execution speed.
Choose Your Strategy
Choosing the perfect trading strategy takes research and time. Bitcoin traders often use a long-term strategy, with trading on other cryptocurrencies being done using shorter-term strategies. However, you need to choose your own. To help you choose check out these videos:[vi] https://www.youtube.com/playlist?list=PLA9Pvtmlbvb5cp0Ou0ePADDGzAF-vt1
Pick Your Cryptocurrencies
Bitcoin is obviously the most well-known, but there are nearly 7000 others. Keeping track of all of them will be impossible, so choices need to be made, at least initially. You can, of course, move between them in the future.
Define Your Risk Levels
One of the most important aspects of implementing an automated trading strategy is to prevent significant losses that will potentially compromise a trader’s capital over the long-term. Before making money, it’s important to learn how to protect your crypto portfolio.
Protecting funds is one of the most important aspects of the algorithm. So set your risk levels accordingly and ensure the algorithm is set up to protect you from losses.
Allocate A Trading Budget
When first starting to invest in cryptocurrencies, it is vitally important to set a budget that can be lost without real impact on your personal finances. This initial budget should then be broken down into a daily trading budget, i.e. how much will be invested on a daily basis. The 1% Risk Rule is an often-quoted rule[vii]. If the portfolio is, for example, £100,000, no more than £1,000 is traded on any single trade. This protects your capital from big losses.
Cryptocurrencies are in-vogue, and you hear many stories of huge fortunes, and losses, being made by people trading on these exchanges. The low barriers to trading and it all being online can tempt people in very quickly, believing they will make a lot of money. This, as mentioned earlier, is a major reason for most day traders losing money. By following the guidelines above, investing time in learning what you can, and then making use of a trading algorithm, portfolios can be protected and, ultimately, grown.
WHY HIGH NET WORTHS SHOULD BE LOOKING AT ANGEL INVESTING IN A NEGATIVE INTEREST RATE ENVIRONMENT
By Oliver Woolley, Envestors
As England gets through its second lockdown, Bank of England policymakers report the UK we may be headed for negative interest rates. This would be the for the first time this has happened in the bank’s 326-year history.
With interest rates already at 0.1%, central bank officials announced an additional £150bn stimulus package, in an attempt to boost consumer spending during the second wave of the pandemic.
Despite news of a vaccine, the BoE has taken the total stimulus to £895bn, as double-dip recession forecasts emerge.
In the event of negative interest rates becoming a reality, banks would have the incentive to lend more by making loans cheaper, but account holders would likely be asked to pay to hold money in a savings account.
While plans for negative interest rates are pending, government bonds are already selling at a negative yield of -0.003%, with investors hoping for the safe haven of government issued bonds paying out to get their money back in three years.
Between negative returns on savings accounts, lower yield on bond holdings, a volatile stock market and a projected dip in property prices, investors don’t have many options to diversify their portfolio in a negative rate interest environment.
However, for investors who are comfortable with risk, early-stage investing may be the answer. Angel investors support early-stage companies through financial backing, typically in exchange for equity in the company. An additional benefit for angel investors is the generous tax reliefs offered under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
What is angel investing and why is it attractive?
An angel investor (also known as a private investor, seed investor or angel funder) supports early-stage enterprises by providing funding and getting actively involved in the business. Typically, the amount invested is between £5,000 and £50,000 per investment.
Early-stage investments are high risk as the number of early-stage businesses that grow through to an exit is low. Previous research suggested that 56% of investments in early-stage companies went bust. This is why experienced angels aim to build a diverse portfolio of 20+ investments.
While angels usually have to wait a number of years before recovering their initial investment, returns can be considerable. Due to the high risk nature of angel investing, high net worth individuals are usually looking for a 2.5x Return of Investment (RoI).
When first starting out, an investor should look for a well put together business plan with a defined exit strategy. Many angels choose to join an angel network when starting out, where investors can pool investment capital and invest alongside like-minded, experienced investors.
Tax relief through EIS and SEIS
In order to encourage investment in start-up companies which play a vital role in the economy, the UK government has launched several tax relief programmes, including the Enterprise Investment Scheme (EIS). This scheme, which makes investing in early stage enterprises tax-efficient, has encouraged £22bn in investment in 31,365 companies.
By investing in an EIS eligible company, angels receive income tax relief of 30% of the amount subscribed for eligible shares. Investors can put in up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies.
In order to qualify, companies have to be trading for less than seven years and can raise a maximum of £12m.
Through EIS, angels receive a Capital Gains Tax (CGT) exemption, carry back and loss relief which can be offset against CGT or Income Tax.
Looking at a practical example:
If an angel invested £10,000 and the company failed, their actual loss would only be £7,000, due to the 30% income tax relief. However, a top rate income taxpayer paying tax at 45% will be able to claim loss relief on their tax liability at the 45% level. In this example, they’re eligible for further relief of £3,150, making their actual loss £3,850.
The success of EIS led to the introduction of the Seed Enterprise Investment Scheme (SEIS), promoting investments in riskier, earlier stage companies. About 80% of UK angel investors seek relief through EIS or its sister scheme, SEIS.
SEIS allows HNWIs to invest up to £100,000 and receive 50% tax relief on their investment. In order for companies to be eligible for SEIS, they have to have been trading for less than two years and cannot have more than £150,000 in previous investment.
Hot investment sectors
Reports from the British Business Bank and the UK Business Angels Association reveal that many investors are still seeing positive returns during the pandemic.
While angels are battling economic uncertainty, around three quarters are optimistic about the market bouncing back within the next 12 months.
Healthcare, Digital Health and MedTech, BioTech, Life Sciences and Pharmaceuticals are the leading sectors in terms of investor engagement during the COVID-19 crisis.
Software as a Service and FinTech have fared well throughout the pandemic and are still attracting a large number of investors.
Getting started with angel investing is now easier than ever, with an array of angel networks that can provide advice and support. Industry-association, the UKBAA, offers an Angel Investment Accelerator which is designed for those new to early-stage investing.
In order to choose the right angel network, HNWIs should look for the most active networks; Research body Beauhurst recently published a list of the most active networks in the UK.
Active networks will present a greater array of screened opportunities as well as connecting new investors to more experienced ones.
The best networks cover a variety of regions, sectors and investment sizes, and they’re forthcoming with examples of previous investments, so first-time angels can make the right choice on how to grow their portfolio.
So, while looming negative interest rates may require a rethink of current investment strategies for many – it might also open up a new and exciting investment class that offers much more than just financial gains.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
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