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Tax Efficient Investment Savings Vehicles

To encourage people to save for retirement and reduce dependency on state pensions, government has afforded South Africans tax incentivised investment vehicles to improve the country’s household savings ratio.

With the 2023 tax year end creeping up on 28th February, you would be well advised to take full advantage of the tax incentives provided by government by topping up your retirement fund (RF) and your tax-free savings account (TFSA). Let’s take a look at how investing in a RF and TFSA (and topping these up before every tax year end) can reduce your tax liability and improve your nest egg at retirement.

Retirement Funds (RF)
RF members are allowed tax deductible (pre-tax) contributions to their RF of up to 27.5% of the higher of their taxable income or remuneration, capped at R350 000 per tax year. These deductible contributions reduce an individual’s taxable income during the year of assessment and thereby reduces their overall tax liability.

Occupational RF members (Pension and Provident Fund Members) that are not utilising their full tax-deductible contribution limit, may make additional voluntary contributions if the Fund Rules allow, or they may start a Retirement Annuity (RA) in their personal capacity for additional contributions to a RF.

Individuals that have an RA in their own name, may top up their RA to the allowed limit and reap maximum benefit during the year of assessment by making a once off lumpsum contribution before the tax year end.

The table below illustrates how contributing to an RA reduces your overall tax liability at different RA contribution levels:

*Calculations based on the 2022/2023 year of assessment SARS tax tables

We can see in the table above, that an individual earning R400 000 per annum, can reduce his/her tax liability by R17 945 by contributing 15% to an RA or save R30 945 by contributing 27.5% to an RA.

Tax Free Savings Accounts (TFSA)
The South African National Treasury introduced the TFSA as an incentive to encourage individuals to save. The aim is to stimulate saving over and above retirement-based savings through a more accessible, tax-free product.

Individuals can invest R36 000 per tax year (up to a maximum of R500 000 over their lifetime) of after-tax money. Investment in a TFSA will enjoy investment growth free of any income tax on interest earned, dividends tax on dividends or capital gains tax on capital gains made. This means that investment growth is untaxed, allowing for even greater compounding.

The below chart illustrates the difference in investing your capital via a TFSA vs a non-TFSA Unit Trust:

The above chart is for illustrative purposes only and shows the difference in the future value of contributions invested in a non-TFSA Unit Trust investment compared to a TFSA.

If we assume annual contributions are made of R36 000 at the beginning of each year, for a period of 14 years (time taken to reach your R500 000 limit) at a 10% annualised growth rate, the future value of your TFSA will be R1 107 809 (growth of R607 809). However, if you were to invest those same contributions in a non-TFSA Unit Trust investment, upon disinvestment, you would have to take into account capital gains tax of R102 205, thus giving you a future value after tax of R1 005 604 (growth of R505 604). There is therefore a clear tax benefit of investing your first R36 000 into a TFSA and thereafter look towards contributing to your discretionary and non-discretionary investments.

For investors looking to invest in an RA or TFSA, we have a comprehensive fund offering that caters to every investment objective and risk profile. Our range of diversified, Regulation 28 conventional and Shariah compliant funds are ideal for long-term wealth creation.

The consistent application of our investment approach is designed to deliver superior risk-adjusted performance over the long term.

The below table indicates the fund suitability for each of these product types: