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Tax-free investment plans : ticking many good investment boxes

17 May 2018Roenica Tyson, Glacier by Sanlam
Roenica Tyson, investment product manager at Glacier by Sanlam.

Roenica Tyson, investment product manager at Glacier by Sanlam.

Your clients have enough reasons to deposit a percentage of their income into a savings plan that yields good returns. Their children’s higher or tertiary education fees; a financial boost to start a business or to purchase an investment property; or a product to complement their retirement savings. These are some pretty sound reasons for your client to start – and persevere – on the journey of long-term, high-earning savings. Nowadays, the three key elements around long-term savings are tax efficiency, discipline and patience. All are required for a successful investment plan.

“Don’t touch!” - encourage your client to step away from their savings account

Encouraging your client to save in a long-term investment account, where early and frequent access is discouraged, is a really good idea for a bunch of reasons. In South Africa, our government thinks so too. Hence, in a bid to encourage long-term, disciplined saving, National Treasury, in 2015, introduced and defined tax-free investments to be savings products where “all returns from such products will be tax-free in the hands of the individual who owns (it)”, provided those products meet the criteria as set out in legislation. With respect to the tax-free savings and investment limitations, an individual may currently contribute up to R33 000 per year with a lifetime contribution limit of R500 000. There are no age limits for the owner of the tax-free account, so it could be a favourable option for parents wanting to start a nest-egg for their minor children.

Roenica Tyson, investment product manager at Glacier by Sanlam, believes that tax-free savings and investment accounts tick many positive boxes, as part of a diversified financial plan. She would encourage every investor to consider including one in their portfolio, and take advantage of the opportunity to grow their savings without paying any tax on the interest, dividends or capital gains they earn. At Glacier we offer access to a wide range of investment funds, catering for all investor risk profiles and a wide selection of top funds in South Africa.

All good things come to those who wait

As with all worthwhile things in life, patience and discipline are vital. The longer your client remains invested, the greater the benefit from tax-free growth, so target a term of at least five to 10 years. Also, the limitations on contributions are quite strict. Your clients cannot carry their annual contribution over to another year, and while withdrawals are allowed, any withdrawn amount will be regarded as a contribution when re-invested. So they need to be disciplined in maximising their contribution each year, and avoid dipping into this savings pot as far as possible.

“Life happens, and unforeseen events result in us sometimes having to dip into our savings, but I would encourage investors in this product to resist the temptation to withdraw from it to ensure disciplined, lucrative saving”, Roenica advises.

Add-on to retirement savings

Perhaps consider tax-free investment plans as complementary savings for your client’s retirement investment. “A tax-free investment plan is a great add-on to a retirement plan”, Roenica points out.

The table below demonstrates the sample values (including the tax savings relative to a normal investment plan) based on a monthly investment of R2 750 over a period of 2, 4, 6, 8 and 10 years, for an aggressive investor, and with intermediary fees of 0.50%. The noteworthy point is that over a 10-year period, total contributions of R330 000 can grow to R536 048, which is R29 222 more than a similar plan without the tax savings.

Assumptions: Return of 11% per annum and marginal tax rate of 35% on investment plan returns.

The benefits are self-evident. Tax-free investments are a viable long-term option as part of a diversified portfolio. Talk to Glacier by Sanlam about the Glacier Tax-Free Investment Plan. Investment income earned within the plan, as well as capital gains are tax-free; and you can adjust your client’s portfolio when their needs and risk appetite change.

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