Tax efficient investment structuring

Saving and building wealth for your retirement can be a complicated and often disappointing exercise for those who are not aware of where to invest to maximise their returns. Incredulously, at a time that we need to ensure that our savings build wealth towards retirement, many choose to have large sums of money just sitting in the bank.

Banks right now are not returning enough interest to even cover inflation, let alone ensure that you are building on your wealth. Far better options are suggested here, so let’s talk about tax saving investment tips to top up your retirement.

Many people spend more than they need to on tax compliance without taking advantage of many areas where the government have created investment opportunities to encourage pension savings. Retirement savings are effectively government supplemented savings thanks to the tax rebate incentive.

It is best that you talk to me, as it is a fairly complicated subject,
but here are few good tax investment incentives…

Tax-free saving account for retirement

Tax-Free Savings Account (TFSA ) are great long term investments if you maximize your yearly benefits and use it for retirement planning. As you may be aware, you are allowed a maximum contribution of R36 000 per annum to your tax-free savings investment. This can either be a debit order (maximum of R3 000pm x 12) or a R36 000 lump sum or a combination of the two per financial year.

The tax-free savings investment comes with a lifetime limit of R500,000.00 per person and has no age limit for contributors. This is a great investment to start for your children early.
Please be aware that all contributions/lump sums are accessible, but if withdrawn cannot be reinvested and your lifetime limit is diminished and ultimately the compound interest growth.

The main recommendation is to complete the R500 000 lifetime amount as quickly as possible (14 years estimated) and then have the balance grow until retirement age to boost retirement income and cashflow without increasing taxation on the income received. This is advisable as pension income will be taxable at income tax tables. Your TFSA investment, after 14 years (R500 000 capital limit reached), then allowed to continue to grow without new investment until retirement age.

Please note all TFSA recommendations, due to long term recommendation, is to diversify your portfolio offshore or Equity based as there are no limitations on where you are allowed to invest. The offshore feeder funds are very easily and cost effectively accessed through our platform with Stanlib.

“Compound interest is the eighth wonder of the world.
He who understands it, earns it. He who doesn’t, pays it,”
Albert Einstein.

Doubling up on tax benefits for retirement

I would also recommend using a retirement annuity to manage taxation more effectively. The RA will give you great guaranteed tax rebates that can be used to pay the TFSA each year or roll over to build snowballing retirement rebate. You are allowed to save 27.5% of your gross income in any form of retirement savings for the rebate, R350 000 is the monetary limit. This means saving for retirement in the conventional way and using your rebate effectively each year you could have exponential growth on your investments with some discipline and determination

The concept works as follows:
Earning a salary of R50 000pm gives you 24% marginal tax rate. Meaning for each R1 invested into a retirement savings you will receive an estimated rebate of R0.24 (24%). This done on an annual basis of investing 20% of income R120 000 (R10 000pm) into an RA will yield an estimated R42 768 in tax returns, to be invested into a TFSA or rolled over to get to get another 24% on the R 42 768 rebate as well (R13 248).

Tripling up on tax benefits for retirement

Additional savings can be allocated to a discretionary unit trust investment. The discretionary unit trust is fully flexible and accessible, giving it great range for multiple investment goals and objectives. Short term low risk investments to give you inflation beating returns while maintaining accessibility as an emergency and nest egg fund. Longer term investments with additional risk due to the extended investment horizon for education savings or deposit on property.

The additional tax advantage is set in retirement when additional income and capital can be withdrawn from the discretionary investment to bolster retirement income and cashflow while having minimal tax effects.

Each person has a R23 800 interest tax exemption and R40 000 capital gains tax exemption per year.

These exemptions can allow for decreased tax on income and capital drawdowns of growth attained in the unit trust. The unit trust can be utilized for additional savings during the year and then once a year we can transfer funds to maximize the RA and TFSA as required to make sure you have maximum gain and tax efficiency.

Additional Notes

I construct all my investments on a cost-effective platform (unit trust basis) this is not a policy, but a pure investment with transparent fee structure.
I do not charge commissions to set up the investment structures and only a management fee of 0,5% – 1% per annum is levied.
The platform costs are varied depending on amount invested from 0,1%-0,5% and the fund fee to belong to the investment fund is also varied from 0,1-1,5%.
This will give you total cost on average 1,5% – 2,5% depending on the chosen funds and amounts being invested.
This fee in most instances will be 2 to 3 times lower than similar policy-based products with insurance companies.

There is more focus being put on fees in modern investing as it can make or break an investment, the fees are guaranteed and can be measured against each other (EAC – effective annual cost), where a 1% difference in fee over 30 years compounded could lead to as much as ⅓ of your investment, lost to costs.