On 1 March 2015 National Treasury introduced a tax-free investment (TFI) opportunity where you can contribute up to R 30 000 per year and limited to R 500 000 in a lifetime. This new initiative provides a great incentive to South Africans to save since interest, dividends and capital gains from these investments will be completely tax-free.
What to invest in
The TFI is designed to work best over the long term, as a long-term approach will allow you to make the most of your annual tax saving increasing your invested assets and growing by the power of compounding year after year. Simplicity, transparency and suitability are the key principles that product providers need to adhere to within this space.
As an investor reviewing available products, you need to consider the expected return, tax saving relevant to your marginal personal income tax rate and suitability relative to your existing investments to ensure efficient use of a TFI.
Equity, for example, is expected to be the top performing, higher-risk investment choice over the long term, but offers the lowest annual tax saving regardless of your marginal tax rate due to the relatively low dividend tax rate of 15%.
Money market and other interest generating instruments have a lower expected risk level and long-term return, but offer a greater annual tax saving. Property has the unique characteristic of having a moderate risk-level, a high expected return and the greatest annual tax saving.
You can also invest in a balanced product which consists of a diversified blend of the above mentioned instruments and consequently have a risk level, expected return and annual tax saving within the extremes of equity and money market products.
Additionally, your tax-saving investment can be combined with a low-cost product to double-up on the long-term savings potential by paying fewer fees.
Choosing a low cost solution
|Expected Return||Contribution Multiplier||Tax Saving|
|Low-Equity Balanced||Inflation plus 3%||2.4||R130 000|
|High-Equity Balanced||Inflation plus 5%||3.0||R140 000|
|Property||Inflation plus 4.5%||2.8||R175 000|
|Equity||Inflation plus 7%||3.5||R150 000|
This table shows the potential gains for a high marginal tax-payer who contributes R 2 000 per month up to a total contribution of R 480 000, and leaves his/her investment to grow for a total period of 20 years.
The total investment value, thanks to compounding, can grow up to 3.5 times the invested amount (represented as the contribution multiplier) and can benefit from a tax saving of up to R 200 000. In addition, by choosing a low-cost solution you can save up to a further R 200 000.
Related: Time to Invest Offshore?
There is no one right choice when it comes to tax-free investing. So, Nedgroup Investments is offering all products eligible according to the TFI regulation (almost the entire range), at no additional charge.
Our TFI offering includes products across the risk spectrum, from money market, balanced funds at various equity levels to pure equity portfolios as well as a low-cost core range. This affords you as an investor the opportunity to find best solution in terms of risk, return requirements and tax savings that is most suitable for you.