Mixed emotions come up when asking people about their investment decisions in 2016. Some made good moves and are now reaping the benefit while others look at the year regretting some of the things they did or did not do. But the start of the year offers an opportunity to lay the foundations for a sound investment plan for the year ahead. Acting now by maximising your contributions towards tax-efficient products for the current tax year will help you take advantage of higher long-term growth rates.
Take advantage of the tax year-end
You still have an opportunity to maximise your tax savings for the current tax year. By declaring any extra contributions to tax deductible savings vehicles (for instance an extra contribution to your retirement annuity) you’ll be able to decrease your tax bill. The deadline to declare these contributions are quite strict though, so make sure you are aware of the dates your product provider has set to have your paperwork finalised. Note that there might be a difference in the cut-off times for financial contributions and the forms needed to declare them.
Up your RA contribution
One of the easiest ways to win in the long run is to increase the contribution you make to your retirement annuity each month. Retirement annuities aim to grow your pre-retirement investment so you have a pool of savings available when you retire. All your investment growth is tax free, the proceeds at retirement are tax free up to a certain amount and your investment contributions are tax deductible up to a specified limit. This means that even a little bit extra every month could make a fundamental difference in your life when you decide to retire.
Your product provider should encourage such behaviour by offering easy ways to increase your contributions like an online investment tool or application forms that make it a once off, hassle free experience.
Tax-free savings accounts
Introduced in South Africa less than two years ago, tax free savings accounts (or TFSAs) are proving popular among South Africa’s middle class. This flexible investment product is geared for growth and can be tailored to your individual needs and risk tolerance. TFSAs have changed the way many South Africans save – making it possible to build wealth over the long term by making relatively small contributions while avoiding having your returns diminished by tax.
You can invest up to R30 000 a year and up to R500 000 over the lifetime of your investment. Options available as underlying investment may vary between service providers but most offer unit trusts that comply to certain criteria, such as simple fees structures. Individual share purchases are not allowed in tax-free savings accounts. You can withdraw funds at any time, but focussing on the long term will ensure maximum reward. A TFSA offers all the flexibility of a standard discretionary investment, without any of the tax implications.