The best reason never to play the lottery
Are you or your clients among the millions of South Africans who gamble away their spare change on the National Lottery? If yes, then it could be time for a serious re-think. You see, the odds of actually winning the lottery are incredibly insignificant; and most gamblers will see only a fraction of their ticket price returned to them in winnings (sic). You may be tempted to dismiss this article until your realise that many mid-income households are tossing away ZAR150,00 or more each week… Incredulous? Let’s take a quick look.
Lotto costs be the bomb…
The main National Lottery pools is branded Lotto. The Lotto is played every Wednesday and Saturday alongside its ‘buddies’ Lotto Plus 1 and Lotto Plus 2. Then, each Tuesday and Friday, punters can take a swing at the Powerball and Powerball Plus draws. A frugal gambler who wants the minimum weekly exposure to each of these draws and pools would end up dropping ZAR35,00 whereas someone who takes things seriously, and buys a full ‘card’ for each draw, would be burning through R1 000,00 per week. PS, a full ‘card’ is 20 ‘lines’ or 20 entries into a draw. This writer is no expert on combinatorics but there are plenty of helpful websites that calculate the chance of winning a Lotto draw at 1 in 20358520, and a Powerball draw at 1 in 42375200.
There are much, much better things to do with the ZAR35,00 to ZAR1 000,00 per week that you or your clients might be spending on Lotto. Case in point, local bank FNB recently published a ‘presser’ revealing that its customers saved over ZAR6.6 billion in 4 years by putting away small amounts of R2,00 to R50,00. “FNB customers prove that every penny counts when it comes to building a savings culture; the bank’s customers are tapping into innovative and automated ways to save, such as using its Bank Your Change® saving feature that can be activated through the FNB App to automate the saving of small amounts from a transactional account…” they write.
“This innovative feature has been instrumental in helping our customers save effortlessly and build financial buffers for emergencies or unforeseen expenses; the success we continue to see with an automated approach to saving also demonstrates the power of allowing consumers more control over the way they manage their money,” said Himal Parbhoo, CEO of FNB Cash Investments, in a statement accompanying the media release. The bank added that efforts to automate savings could go a long way towards helping consumers adopt positive money habits, and this writer agrees. Of course, FAnews has no intention of doing the bank’s marketing for them; but the outcomes of a disciplined approach to savings are worth exploring.
This does not constitute financial advice
With the disclaimer that what follows does not constitute financial advice, this writer is a big fan of the tax-free investments that were introduced by National Treasury | the South African Revenue Services (SARS) from 1 March 2015 as a vehicle for savings. It is certainly a way better destination for a household’s lotto money or spare change. An individual taxpayer can contribute up to ZAR36 000,00 per tax year into a tax-free investment account with an upper cap of ZAR500 000,00 over his or her lifetime. The tax-free part of this investment is that you do not have to pay any income tax, dividends tax or capital gains tax on the returns from the investment. It is important to note that you cannot carry over any part of the annual limit that you do not use into a subsequent year. It is just as important not to exceed the annual cap! PS, SARS has occasionally increased the annual limit, which started at ZAR30 000,00 when the scheme was introduced, but the total lifetime cap has not been revised.
There is no shortage of tax-free investment options to choose from. Per SARS, “the tax-free investments may only be provided by a licenced bank, long-term insurer, manager of a registered collective schemes, the National Government, a mutual or co-operative bank, the South African Postbank, an administrative financial services provider and a person authorised by a licensed exchange to perform one or more securities services in terms of the exchange rules”. And you hardly need to go in search of a tax-free investment opportunity; they are everywhere! To illustrate the power of this savings methodology, imagine you had taken up the offer from 1 March 2015.
By this writer’s calculation, those making the maximum possible contribution to a tax-free investment account would have invested ZAR267 000,00 by 1 March 2023 and be well on track to hit the ZAR500 000,00 lifetime limit by the 2030 tax year. Capital gains and income on this investment account will vary significantly depending on the type of investment you chose. Assuming you opted for a conservative bank savings account option, and earned a consistent 6.5% interest on your investment over the period, you would already be sitting on around ZAR347 000. PS, this is a basic calculation for illustration only, savings account interest rates varied widely over the period 2015-2023.
Too many investment types to choose from
The long list of financial institutions that offer tax-free investment accounts should give you a heads up on the variety of exposures you or your client can obtain, from the safe-and-simple savings account all the way through to multi-asset exposures or equity only exposures in unit trust funds. Just Google the phrase ‘tax free investment South Africa’ and you will come up with countless sponsored links from the asset management and banking communities. It is also quite easy to access this product from the main menu of your personal bank account. In FNB’s case you click on ‘Invest’ | ‘Tax Free Savings’ | and then choose from ‘Tax-Free Shares’ or ‘Tax Free Cash Deposit’. And of course, “SIGH”, be sure to read the 19-clause agreement before closing the deal.
Clients who are serious about money are going to want to consult you, their financial adviser, for help with their tax-free investment choices… And for those who prefer the DIY route, get ready for some reading. Case in point, Allan Gray offers an 11-page PDF explaining the product without going into any detail on the underlying investment choice beyond saying “your investment is into your choice of unit trusts”. Need help beyond that, and they advocate the financial adviser route: “Choosing suitable products and unit trusts can be overwhelming; if you do not feel equipped to make your own investment decisions, or if you lack the time, you may wish to consider talking to an independent financial adviser”.
Why gamble when you can invest, affordably
Returning to our opening paragraph that highlighs how much money you or your clients could be wasting on the Lotto and Powerball, the conclusion must be that R692 per week is far better spent on tax-free investments than gambling. We know our financial advice readership will agree, so the question becomes how to get Jane and Joe Average on board?
Writer’s thoughts:
It is hard to argue against the tax-free investment if the alternative is pouring the premium into the National Lottery… The question is: how does the tax-free investment measure up to other investment alternatives? Are tax-free investments a no-brainer, or are we missing something? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]
