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Tax-Free Investments: The gift that keeps on giving

16 September 2020 Standard Bank

For many South Africans investing seems impossible because of the current socio-economic pressures we are all facing. Uncertainty over whether you will still have a job or if your business will be able to survive the current economic shutdown are amongst our biggest concerns. However, if there is one lesson the current economic environment has highlighted it is the need for long-term financial planning.

South Africans do not have a strong savings culture, especially when it comes to retirement, which is why tax-free investments (TFIs) were launched in 2015 as part of the Government's initiative to encourage South Africans to save more.

Unlike traditional investments, TFI returns are exempt from local income tax, dividends tax and capital gains tax making them an attractive investment vehicle for long-term, goal-driven investment. TFIs have several investment benefits, most of which are best realised by staying focused on your long-term investment objectives and staying the course.

While it is important to note that any funds withdrawn from TFIs cannot be replaced, when managed correctly TFIs can lead to a substantial cash injection for financing major life events.

“Tax-free investments have become an important part of a well-rounded, diverse investment portfolio, they are a tax-efficient way to subsidise your long-term investments such as your retirement or saving for your children’s education” says Thandi Ngwane, Head of Investment Distribution at Standard Bank.

Tax-free Investments to subsidise your long-term investments
One important advantage of a TFI is that you can invest in more than one at a time, which makes it easy to set up a TFI for each investment objective. If you have more than one TFI you are still restricted to the annual contribution limits, so your R36 000 will have to be divided across all your TFIs. It is important not to exceed annual or life-time contribution limits as any excess will be subject to a penalty tax of 40%. Returns on your investment do not count towards these contribution limits.

You can also open a TFI account in the name of a minor and many parents or grandparents use them as an investment for their children or grandchildren without having to exceed their own investment threshold.
It’s important to remember that if you invest in a TFI in your child’s name and contributions reach the R500 000 threshold (as per current legislation) when they are 18, they would have made use of their personal lifetime limit and will not be able to continue their contributions or invest in a new TFI. It is however probable that the lifetime limit may be increased over time.

As Ms Ngwane further noted: “TFIs are one of the most tax-efficient ways of providing your children with a kickstart later in life. The money you invest over time stands to benefit from the value of compounding with the added advantage of the proceeds being completely tax free.”

Let compounding interest work for you
While there are limits on the contributions which you can make to your TFI you can leverage the returns your investment makes over time.

Having the vision to plan long-term is important to ensure a secure financial future. In times of difficulty such as the one we are facing it’s understandable for one to focus on short-term survival. However, for those who can still consider investing and saving for their family’s future, a tax-free investment is an invaluable addition to any investor's portfolio. Through it, you're able to take advantage of great tax breaks and use it for your own benefit and to give your loved one a gift that keeps on giving.

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