How to maximise returns and reduce tax

Oran A. Hall, Gleaner Writer

Question: I have J$7,400,000 in a commercial bank. I need help in deciding how to invest it in order to maximise the returns and minimise the tax that I would pay on the interest gained.

- Campbell

Answer: If interest is all you require, I am not aware of any commercial bank product that would give you tax-free interest, though there are interest-bearing instruments elsewhere in the financial system that can give you that benefit.

If you want to keep your funds in a commercial bank, a fixed deposit will give you better returns than a regular savings account and the other types of savings arrangements that are emerging.

It seems, therefore, you would need to look beyond the commercial bank to achieve your objectives. A decision to get the most from your money is not one made in isolation. There are many considerations to be made.

You need first of all to consider your life goals. Once you have a life plan in place, you proceed to make a financial plan, which is necessary for generating the financial resources to realise your life goals.

Consider also your current financial position. Do you have debts? Is the $7.4 million all you have, or is it just a part of a larger portfolio? If it is, what portion of the portfolio is it, and what does the rest of the portfolio look like? How are your needs being met by the financial resources you have, and can they meet your future needs?

What is your tolerance for risk? Are you by nature able to tolerate financial losses, and if so, to what extent? How old are you? What responsibilities do you have? What is your time frame for realising your goals?

Many questions

What do you know about financial and investment matters, including products and how the markets operate? Do you have the time and know-how to manage your financial affairs, or would you require the services of a professional? If so, would you want to give full decision-making powers to that professional, or would you prefer an advisory relationship?

These are an awful many questions, but the management of your financial affairs must be deliberate, and you must know exactly what you want to help you make sense of what is being done with your money, even if you give full discretionary authority over your affairs to a financial professional.

What I said above, notwith-standing, there are some clear options that can be taken to achieve certain results. Your overall goals and objectives, preferences, risk tolerance, time horizon, financial position, among other consider-ations, will determine how your financial plan looks and the strategies that are employed to drive it.

If you want to get better interest rates, there are treasury bills and repurchase agreements at the short end. Government and corporate debentures and bonds are available for medium- to long-term investment.

Money market unit trusts, though not distributing income, owe their increase in value to the earning of income which is reinvested, thereby boosting the value of your investment.

As I have stated in this column previously, an effective way to earn tax-free income from interest-bearing instruments is through long-term savings accounts - five-year savings commitments requiring withdrawal of no more than 75 per cent of interest earned in any year, no withdrawal of principal prior to maturity, and maximum annual savings of $1,000,000.

Preference shares, which are not so common in our market, are good sources of income, but share prices may fluctuate with changes in interest rates, among other factors.

Real estate investment trusts are another source of income. Though generally low relative to today's stock prices, dividends paid by companies listed on the Jamaica Stock Exchange are not taxed.

If you want to get better returns than are available from the best interest-bearing instruments, then ordinary stock and real estate or pooled investment vehicles, such as unit trusts and mutual funds, which invest in them, with their potential for capital gains, which is not taxed, are options - if you have the stomach for risk.

From this distance, it is not feasible to give advice for your specific situation, so I have just made mention of certain general issues which should assist you in charting a course.

It is essential that you sit with a reputable, competent, and trust-worthy professional from the financial sector and have a full discussion of your current financial situation and what you want to achieve in the short, medium and long term.

Good luck!

Oran A. Hall, member of the Caribbean Financial Planning Association, and principal author of 'The Handbook of Personal Financial Planning', offers free advice and counsel on personal financial planning. E-mail finviser.jm@gmail.com