5 Tips to Choosing a Tax Free Investment Option best for you

Tax Free

By Leston Dick of Corewealth Advisory Services

Choosing the best tax free investment can be a very daunting task, especially if you have very little knowledge of investments. We are so bombarded with marketing information from investment companies, banks etc. that we often struggle to identify which investment option will be the most suitable for your investment goal.

The first thing you need to understand are the rules of a tax free savings investment and what makes it unique from other, ‘traditional’ investments:

  1. Tax free savings investments have tax free growth – this means that the profits (capital growth and interest) are not taxed.
  2. Tax free savings investments have an annual contribution limit of R33 000 and a lifetime limit contribution of R500 000. Growth on the amounts you contribute over and above these limits will be taxed at a flat rate of 40%.
  3. Tax free investments are only allowed for individuals (companies and other entities cannot directly invest in a tax free investment).

Now that we understand the workings of a tax free savings investment, here are some handy tips for when you consider investing in a tax free savings investment:

Tip 1

Invest for the long term. Remember that the growth on your investments are not taxed and this means that you will receive growth upon growth of your investment – also known as compound interest.

Tip 2

Make sure you know how much investment risk you are willing to take on. It is important to only take as much risk as you are comfortable with. Once you know how comfortable you are with risk, it will be much easier to choose the correct investment strategy to suit your investor profile.

Tip 3

If possible, get professional advice to help you make the correct investment decision. You will do yourself a great favour if you consult a qualified, independent financial planner to assist you. Having an advisor will not only ensure that you end up choosing the correct investment portfolio suited to your investor profile and needs, but your advisor will also ensure you stay invested (especially when markets are volatile and investors get nervous).

Tip 4

Make sure you choose the correct investment ‘vehicle’. This would be the difference between either investing in a unit trust investment or investing via a bank account. Make sure all the limitations are disclosed to you examples of this is:

  • Can you stop regular contributions or change the amount whenever you need?
  • Can you make withdrawals from your account whenever you need to?

Choosing the correct vehicle also means that you should be looking out for all the costs charged on your tax free investment. Examples of charges are advisor charges, unit trust fund charges, administration charges etc.

Tip 5

Choose a tax free investment that gives you the best possible flexibility. It is best to have a tax free investment that will allow you to change the risk your portfolio is exposed to as you reach different stages in the life of the investment (however long it may be). The ability to change the underlying portfolio of your tax free investment gives you peace of mind that should your investor profile ever change, the risk on your portfolio can be adjusted. Be sure to look out for how much it could cost to make these underlying changes to your portfolio as it is best to opt for a tax free investment that will not charge you to make changes to your portfolio.

Since its introduction in South Africa, tax free savings investments have taken the markets by storm and has succeeded in encouraging all South Africans to save for their future goals without having to bear the burden of tax on their investment growth.

Be sure YOU use this opportunity to ensure you continue to grow your wealth!

An image of Leston

Leston joined Core Wealth in January 2017 as a Para-Planner and has now stepped into the role of Associate Financial Advisor in 2019.

Leston is a firm believer that everyone – wealthy or just starting to create their wealth – has a need for comprehensive financial advice. It is this belief and passion that has helped him grow into the role of Associate Financial Advisor. He aims to help his clients reach their goals by seeing that their financial plans comprehensively cover the areas of risk, wealth, tax and retirement planning.

Leston obtained a BCom (Financial Planning) Degree and a Post Graduate Diploma in Financial Planning through the University of Stellenbosch. He has also already passed his FPI Competency Board Exam in February 2018 and is in the process of obtaining his Certified Financial Planner® (CFP®) designation.