Do you know that over a 20-year period, you could give away more than a quarter of your investment returns to the taxman?
That is why tax-free investment accounts are becoming so popular and why they have a place in everybody’s investment plan. The growth on the fund can be withdrawn tax free and there is no tax on dividends or interest.
You are allowed to contribute up to R36 000 every year with a lifetime contribution limit of R500 000. This is equivalent to a monthly contribution of R3 000 for just under 14 years. (NOTE: This has been updated from R33 000 – the video was filmed prior to the increase)
It is important to note that if you exceed the R36 000 annual limit you will be taxed at 40% on any amount above this.
Also be aware that if you withdraw any funds, the lifetime limit still applies so you cannot make additional contributions to replace the funds you withdrew.
People may think they are not saving enough for tax to make a difference, but over time, capital gains can be large, and so the tax saving does become significant.
Imagine if you are just saving R500 a month into a unit trust for 12 years in order to save for your child’s university fees.
Assuming the fund grew at a market average return of 10% a year, after 12 years it would be worth R139 000, but you only invested R72 000.
That gives you a capital gain of R67 000. The current annual exemption for capital gains tax is R40 000, so you will pay capital gains tax on the balance (R67 000 minus R40 000) of R27 000. That is not even considering the 20% tax you would have paid on any dividends received by the fund over those 12 years.
It is important to understand that tax-free investments are most tax efficient when they are used for long-term investing. So, you need to be investing in growth investments like unit trusts or exchange-traded funds, not just cash in a bank savings account.
Tax-free accounts allow you to invest in a large range of investment products. It is purely the structure through which you invest so that you do not pay tax on the underlying investment. So, for example, if you want to invest in a unit trust or an exchange-traded fund but want a tax benefit, just ask the relevant investment company for their tax-free option.