28 May 2018. Article by Yoren Chetty
We thought it apt to remind you to make the most of your R 33 000 annual allowance that you can put towards your Tax-Free Savings Accounts (TFSA). Whilst R 33 000 per annum does not sound like much to certain middle-income and as well as the more affluent individuals, below are 3 benefits of the product which can make a rather significant difference to your long-term wealth creation goals:
- There is no restriction in terms of the underlying assets that you hold and it is encouraged that you invest in high growth assets such as equity and property (both local and offshore) to achieve optimal growth over the lifetime of the investment. Given that the lifetime contribution limit for an individual is currently R 500 000, this gives us over 15 years as an investment time horizon to ride out the peaks and troughs of the local and global markets in order to realise healthy capital gains on share prices and increased income in the form of rental income and dividends, all of which is earned and compounded free of tax. This then translates into superior investment returns over the longer term when compared to other voluntary investment vehicles with the same underlying funds that do attract tax.
- The underlying funds that can be chosen within the Tax-Free Savings Accounts are from a select class of funds that do not attract performance fees, which enables product providers to offer the product at very competitive fees compared to regular unit trust products.
- Tax Free Savings Accounts can be used to supplement your retirement plan. Here’s an example of a strategy that you can use: If you have maximized your annual exemption towards retirement fund contributions, you can use your Tax-Free Savings Account contributions as an additional means of acquiring tax free investment growth. After you have reached your annual lifetime contribution, keep the funds invested in your Tax-Free Savings Account until you approach retirement. Just before you are due to retire (say, a month or two before), resign from your employer and preserve your corporate retirement funds and keep your retirement annuities untouched. Rather draw down from your Tax-Free Savings Account first to fund your immediate income needs in retirement – this income can be drawn without you having to pay income tax. Then deplete these funds over time – Why? Because the Tax-Free Savings Account does attract one form of tax, viz. Estate Duty; as it forms part of your estate upon your death. So rather consume it whilst you’re alive than leave it to your heirs as the Estate Duty (if applicable in your case) can destroy some of its value. Once you have depleted your Tax-Free Savings Account, then look at converting your preservation funds and retirement annuities into an income stream – hopefully you will be over 65 (or perhaps 75), and you will be allowed a higher rebate on your marginal rate of tax. Remember, the income from a post-retirement annuity is taxed according to PAYE scales. Another valuable point is that any capital left over in your pre-and post-retirement vehicles is excluded from your dutiable estate, meaning that your heirs can inherit from these vehicles without having to forego some of its value in estate duty. This strategy will also enable one to sustain the buying power of their retirement capital over a slightly longer period, which is crucial as we all face longevity risk given advances in medical technology, improved lifestyles and diets, etc.
Given the advantages of the product highlighted above, I would suggest that you contact your Morebo Financial Adviser be it to top-up your existing Tax-Free Savings Account or to open an account if you haven’t already done so. If you can afford it, I would also recommend that you open an account for your minor children or grandchildren – this will be an extremely powerful gift that one can give to them over the long-term. And remember, we are each allowed an annual donations tax exemption of R 100 000, so this can work in your favour.
Happy Tax-Free Investing!