Hack your tax with a tax-free investment | Fin24
 
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Hack your tax with a tax-free investment

Dec 14 2018 11:17
coronation

Source: Supplied

For South African individual investors, only two products attract significant tax breaks which investors can use to their advantage - retirement annuities (RAs) and tax-free investments (TFIs). Each product has a different function in an investment portfolio, so it is not a case of one being preferable to the other, as investors ideally should have both.

RAs are generally used by people who do not belong to a company pension fund but rather contribute to their own retirement. RAs are taxed on an EET basis (exempt contributions, exempt investment returns, taxed withdrawals) so have the benefit of tax-deductible contributions upfront but face the downside of taxed withdrawals in retirement.

“Government effectively subsidises your savings,” says Pieter Koekemoer, Coronation’s Head of Personal Investments. “The downside of an RA, however, is that you do not know what the applicable tax rate will be at the time of retirement, when you start withdrawing funds. Also, you cannot access your funds until the age of 55, and your investment choice is limited to funds compliant with the Pension Funds Act.” 

If an investor already has an RA or a workplace retirement fund and has some cash at the end of each month, or an end-of-year bonus, for example, a TFI is worth considering. You can invest between R500 and R2 750 via a monthly debit order, or a lump sum of up to R33 000 per tax year, and up to a maximum of R500 000 over your lifetime.

While there is no tax break when contributing to a TFI, no tax is accrued during the investment period and all proceeds withdrawn from the investment are tax free.

“Investors therefore have complete tax certainty and do not have to worry about facing a larger-than-expected tax rate when they withdraw funds from their investment in future,” Koekemoer says.

TFIs also offer a wider range of investment options than RAs and investors with a long-term investment horizon can invest in a more aggressive portfolio which allows for higher expected growth than that achieved by the more constrained investments of an RA.

Better to invest than to save

Both RAs and TFIs are transferable between providers. Many TFI investors hold a deposit-linked investment with a bank. It currently makes sense to consider moving this investment to a unit trust- based TFI, which usually offers greater access to growth assets (such as equities and listed property stocks) and therefore the potential of larger upside if held over the long term.

“It is better to invest than to save,” says Koekemoer. “The sooner you invest your life-time allowance, the more you will reap the rewards of long-term investing and the power of compounding.”

Coronation’s TFI product offers access to their range of domestic flagship funds. They have also added a number of their rand-denominated international flagship funds to the selection.

Says Koekemoer: “You can switch between funds, or withdraw money, without incurring any costs or penalties. Just be mindful that all amounts invested will count towards your annual and lifetime limits regardless of any withdrawals you make – you cannot ‘replace’ the money you withdraw with a new investment.”

To find out more, visit the coronation website 

savings and investment  |  tax  |  coronation
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