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 The growth on the fund can be withdrawn tax free and there is no tax on dividends or interest.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.
Hi Maya
I have already started to invest for my child education via old mutual educational plan but it’s not a tax free investment.
Would you recommend I cancel it and take whatever amount I get from old mutual and put what I get in a tax free investment and start paying monthly like I used to pay the educational plan?
It depends on when you think you will access the money. Tax-free investments work best if you are investing for over 10 years because that is when the capital gains start to become significant. In my case I saved outside a tax-free investment for education but also started a tax-free savings in my sons’ names that they could continue to grow and add to when they start to work.
Hi I’ve jst been retrenched I need the best abvise on how and where to invest my money in please help.
This article will provide some guidelines https://mayaonmoney.co.za/2019/10/retrenchment-survival-guide/
My advise is not to use the payout to fully settle debt – rather put it in a 7 day notice account for now and work out how much you need each month to survive while you look for work opportunities. If you find work/income sooner then you can invest what you have left
Thank you Maya. My child is 6 weeks and I have been looking to start investing for her future. I already have a tax-free investment plan with Old Mutual, so I will now be taking out 1 in my daughter’s name.
Hi Maya
Thanks for the article but I noticed some discrepancies in the article and video. The video speaks of 33 000 annual contribution and 2750 monthly contribution while the article speaks of 36000 and 3000, which one is correct?
unfortunately the video was recorded before they increased the limits – so we updated the transcript. But I will make a note in the text. The R36 000 is correct