Make tax free investment go further during hard times

By Opinion Time of article published May 28, 2021

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With the devastating economic effects of the Covid-19 Pandemic, the Government dropped interest rates sharply to stimulate the economy through spending. While this low interest environment might make spending attractive, it should be done wisely and investing must remain a priority for every citizen, including children.

Since March 2015, when the South African Government introduced its tax-free investment incentive to encourage saving, the annual allocation has increased from R30 000 to its current level of R36 000 (lifetime maximum of R500 000).

Sisandile Cikido, Head of Retail Investments offers the following guidelines on how to take advantage of tax-free investment following the Finance Minister’s Budget Speech earlier this year.

Max Out Each Year

Whether you are risk averse or not, one should not pass up the opportunity to invest in tax free investment products, as it allows you to keep all your investment returns. And, with the effects of compounding interest, your gains are amplified over the long-term. With this, allocating the maximum amount of R36,000 is ideal because it allows you to gain the full benefit of your contributions, giving you the opportunity to reinvest your capital gains into another product. However, regardless of your monthly contributions by starting your portfolio with a tax-free account and maxing out your annual allocation before moving onto other product categories, your tax savings can be massive at realisation of the investment.

Keep a Schedule

You might not be able to dedicate a set amount each month, opting to rather invest when extra cash becomes available. Even if it’s as simple as a piece of paper stuck to your wall, make note of how much you put into your tax-free savings account (which you can deposit into monthly or as often as you want) over a financial year. You could, for example start in March and end in February of the following year. Keeping track means you can deposit extra funds when they become available which allows you to top-up without going outside of your annual allocation.

Leverage Tax-free Gifts

Each individual, including children, has an annual allocation. So, if you are in the fortunate position to have extra money to invest, consider setting up a tax-free fund for your children, grandchildren, or nephews. In fact, you can gift adults a tax-free investment, including your own parents or grandparents, and make sure your money works even harder.

Never Draw from Funds

Tax-free allocations aren’t redeemable, which means that if you withdraw money from a tax-free account, you can’t replace it later in the same financial year. Once the allocation has been used up, it counts towards your lifetime allocation of R500 000. So, make sure you are committed to the journey for the long-term, if you want to make the best out of your tax-free allocation.

Cut Costs

Many South Africans lost their jobs or have seen their incomes drop significantly in the past year. As you wait for your UIF (unemployment) benefit, the temptation is to rack up debt on living expenses and pay it off later. However, you can rather use this time as a good opportunity to explore radical ways to save. Temporarily pooling resources with family members, downgrading your vehicle and renegotiating rent can free up some cash to not only eliminate debt, but to also invest.

Over the past year, South Africans have been impacted by the economic fallout of the pandemic. Even for those fortunate enough to retain their jobs, supporting family members who have lost work has added pressure to their lives. Despite this however, the power of tax-free investment incentives can help to keep the momentum of long-term saving. By living well below your means and temporarily cutting out luxuries, you can place extra funds in a tax-free investment, putting you on the path to financial freedom, while allowing you to do more for yourself and your loved ones.


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