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A recent series of Allan Gray articles highlights some tax-saving tips that are important to revisit, especially with the tax year (28 Feb) coming to an end and ensuring that you have taken advantage of your tax savings.
There are many different investment products to choose from that all have different savings benefits: unit trusts, endowments, retirement funds (pension and provident funds, retirement annuities), living and life annuities, tax-free saving accounts and offshore investments.
When selecting one of these products, the following need consideration:
- Your age
- Your appetite and tolerance for risk
- Your current and future needs
- The kind of access you need to your investment
- The tax efficiency of your chosen product
Main tax benefits per product
Retirement funds
You pay no tax on interest, dividends or capital gains while invested in these funds.
Contributions up to 27.5% of your annual income or a maximum of R350000 per year are tax deductible.
There are tight restrictions to withdrawing and only accessible when retiring or resigning from funds.
Endowments
Income taxes are a flat 30% on interest earned, 12% on capital gains and 20% on dividends.
They offer better savings for high-income earners but have restrictions on withdrawals in the first five years.
Tax-free savings
You pay no tax on interest, dividends, or capital gains.
You can invest a maximum of R36000 per year or R500000 in a lifetime.
Unit Trusts
Interest, capital gains and foreign dividends are taxed at your marginal tax rate. Local dividends have a 20% withholding tax.
This is the most flexible investment product with minimal restrictions.
Offshore Investing
You can take R1m offshore every calendar year without getting SARS clearance.
There are many different types of benefits and restrictions per country.
For South Africans, the best option is investing in an ‘Endowment Wrapper’ which effectively reduces taxes to 12% on capital gains when withdrawing and avoids taxes on Rand movements. In addition, the estate planning benefits are very efficient and simple.
Maximise your tax benefits before year-end (28 Feb)
Every year you can contribute 27.5% of your annual income, capped at R350000, to your retirement fund. If you have not maximised this benefit, you can make an additional contribution or you can start a new retirement annuity to top up.
You can invest R36000 per year into a tax-free savings account with a maximum of R500000 over your lifetime.
Get help from a qualified and experienced Financial Advisor
Tax benefits are one piece of the puzzle and different products should not be looked at in isolation. Each offers different benefits and should be considered with different combinations to achieve the best long-term benefits.
An independent Financial Advisor (such as Investonline) will assist you to:
- Build your own personalised, holistic final plan that considers your goals, retirement, estate planning, liquidity constraints, offshore structuring, and tax efficiency.
- Ensure you invest in the right products or a combination thereof.
- Establish your personal risk profile and match it with the appropriate investment strategy.
- Incorporate the right asset allocation and offshore investments with the necessary diversification.
- Review your investment portfolio regularly and recommend adjustments when necessary.
- Have regular meeting reviews to ensure your plan remains on track.
