What to do with your tax refund

The South African Revenue Service recently announced it has paid out a record amount in refunds, with taxpayers receiving a total of R321.1 billion.

If you are lucky enough to have been one of the recipients, you may be uncertain of what to do with your windfall, especially as the uncertain economic climate, volatile markets and astronomical prices of everyday goods and services like food and fuel may be causing some anxiety.

Should you spend it, or invest it? And if you are leaning towards putting it away, where should you be putting it for maximum returns given SA’s low-interest environment?

“While it is tempting to simply splurge, if you have a financial plan in place and receive an unexpected windfall, try to remain committed to your goals and don’t let your emotions derail your plans,” says Carla Rossouw, Tax lead at Allan Gray.

How to decide what to do with your windfall

“Treat your windfall like you would do the rest of your income by allocating portions of it to service your debt, grow your retirement savings pot, or invest your money to earn real returns – of course you could allocate a small portion for spending,” advises Rossouw.

If you don’t currently have a financial plan, perhaps receiving a windfall could encourage you to put one in place. A good place to start is considering your budget, needs and goals, with the assistance of a good, independent financial adviser, if necessary.
“When thinking about your windfall, it is useful to consider your broader objectives. Do you want to be able to access the money in an emergency, or do you have a greater need for security at retirement,” says Rossouw, adding that this will help you think about how to allocate the funds.

Accessing your money in an emergency

She says that all investors should ensure that they have a sufficient emergency fund in place and an unexpected windfall may help you to start one, or to add to your capital.

“An emergency fund will provide you with access to money and prevent you from abandoning your long-term financial plans when unexpected expenses or emergencies threaten to compromise your financial health.”

She says a good parking bay for your emergency fund is a low-risk investment, such as a money market fund, which aims to deliver higher returns than a bank deposit and can be accessed in a short space of time if disaster strikes.

Contributing towards your retirement savings pot

A tax refund gives you a great opportunity to increase your retirement savings pot. SARS offers you a generous tax deduction of 27.5% of the greater of your taxable income or remuneration for the tax year, capped at R350 000 per annum, when you make contributions to your retirement annuity (RA), pension or provident fund.

“By adding to your retirement savings, you could reduce the amount of tax you pay next year.”

Could tax-free investing be the answer?

A tax-free investment, or TFI, remains a popular choice because it allows investors to benefit from tax savings on investment returns. It is also a useful product for estate-planning purposes.

“However, there are restrictions and limitations that you have to be comfortable with. If you can live with these, are disciplined, and intend to remain invested for the long term, a TFI can supplement your retirement savings and give you a tax-free lump sum to enjoy,” explains Rossouw.

Investing for long- and short-term goals

Rossouw says unit trusts are suitable for most financial goals, to meet both shorter- and longer-term objectives. They will help investors who want the convenience of exposure to the assets of their choice, without having to buy those assets themselves.

“It remains true that if you are investing for the longer term and are looking for growth, then consider riskier assets, such as equities, as these have the potential to generate higher returns.

“At the end of the day, remember that while investing may feel like a sacrifice it is just deferred spending – you put money away to grow so that it can meet your needs in the future,” concludes Rossouw.