I’m sure by now you have heard something about the big tax-free savings buzz! Companies have launched products left, right and centre to align themselves with the new legislation that came out in March this year.
The long and short of it is that you can now invest tax free in certain approved products. No tax on interest earned, dividends or capital gains. Sounds fantastic doesn’t it? The pitfall of this is that you are limited to only contributing up to R30,000 per year or up to R500,000 over your lifetime. With current tax exemptions as they are (R23 800 pa for interest), dividends only being taxed at 15% and with a capital gain allowance of R30,000 per year – it takes a large sum invested to exceed these exemptions. With the maximum contributions applied, the only other way it can build up enough to make full use of the tax benefit is to be invested for a REALLY long time. I’m talking, 25 years minimum. Want to contribute more than allowed? They smack you with a tax rate of 40% of whatever is over.
Realistically, who has goals that are that far away that are not retirement? It’s not a good idea to substitute your retirement annuity for this because those gains are tax-free too and you have the huge benefit of your income tax deduction. Although yes, you are taxed once you retire, I still wouldn’t substitute it. One of the reasons being that you can’t nominate a beneficiary and the funds are dealt with in your estate, which attract estate duty and executors fees.
When should you consider tax-free savings?
The most practical way I can think of to make use of the new legislation is it to be an investment for your child. In this way, you have time on your side. You could start the investment when your child is born and put funds away for their future. The downfall is that the investment will need to be in your child’s name and there would be nothing legally stopping them from accessing the funds before they should.
What tax-free product to invest in?
Like other investment, there are choices of what to invest in. Fixed deposit accounts, unit trusts or share portfolios. I would strongly suggest staying away from fixed deposits as this is too conservative for a long-term investment – you can do better over time by taking on more risk. Share portfolios are suitable for the long term, however, fees tend to be higher than unit trusts. Unit trusts with high exposure to equities are probably your best bet, although the tax-free universe is a lot smaller. As always make sure you do your homework.
I can’t seem to fathom what the big fuss is about.
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A version of this article was originally published on www.littlemisschats.com
Beth Orchison CFP®
B.Comm (Stellenbosch) Financial Navigator