Advice more vital than ever in TFI era

Lara Warburton, managing director of Imara Asset Management South Africa.

Recent investment product innovation – with more to come – makes it even more vital that retail investors seek professional guidance on new ways of building a nest-egg while containing tax liability.

The tip comes from Lara Warburton, managing director of Imara Asset Management South Africa, an Illovo-based advisor and fund manager that serves a growing number of retail investors.

“New opportunities to reduce tax exposure while building a meaningful capital sum are now available to South Africans,” says Warburton. “To maximise the opportunity most people will need the assistance of a qualified financial advisor.

“Government’s introduction of tax-free investments (TFIs) can be a game-changer, whether you’re saving for retirement, providing for your kids or squirreling money away ahead of possible emigration.”

This investment product was introduced in March. Some product providers have already created offerings with a TFI structure. Others will follow suit shortly.

Key TFI features include:

• The ability to save up to R30 000 a year in a TFI (though lifetime contributions are limited to R500 000)
• Over time, growth in the vehicle can be substantial, with potential for a multi-million pay-out – enough to fund a comfortable retirement
• You can cash out at any time unlike a retirement fund or fixed deposit, but it loses its tax free status
• Transfers between TFI products are possible where tax free status is retained
• Consumer choice – you have the option of a TFI bank account, unit trust, a life company product like an endowment or a government-issued security
• Tax-free growth within the investment (interest and dividends are tax free and there is no capital gains tax)
  
  The market for this new category of product is still evolving, says Warburton, and new variations on the TFI theme can be expected in the coming months.
  
  She notes: “Unit trust companies face a key constraint as they have to issue a new class of TFI units in their funds. This can only be done immediately after a distribution.
  
  “For this reason, it may be mid-year before some TFI unit trusts make their debut. Most of the unit trust options currently available include additional investment platform costs that may not be necessary for all investors.
  Consumers should therefore wait to see the cost benefits and growth potential of equity-based TFIs versus the alternatives.
  
  “For the moment, it is important to be aware that significant product innovation is on the way. Consumers should ask their financial advisors for a full briefing.”
  
  Important distinctions need to be explained. For instance, investment growth in the product is tax-free, but contributions into the instrument are not tax deductible (unlike contributions into a retirement annuity).
  
  Warburton cautions that all product innovations have to be carefully assessed.
  
  She notes: “Tax breaks look good, but even more important is the fit between product selection and a client’s overall needs, objectives and financial position.
  
  “That’s why advice from a trusted professional is so important.”