Tax-free savings make a difference

2017-03-24 13:38

If you are younger than 35, investing in a tax-free savings account (TFSA) is a “no-brainer”, says Charles Savage, the CEO of Purple Capital, which owns the low-cost online brokerage company EasyEquities.

With at least 20 years of investment growth ahead of you, the capital gains and dividend tax you would save through a TFSA could boost your final return by as much as 36% – that is more than a third of your potential return that you would throw away by not investing in a TFSA.

The tax benefits of TFSAs became even more attractive with the announcement in last month’s Budget Review that dividend tax would be increased from 15% to 20%.

High-income earners (if that is not you now, it could be in the future) will also be hit with higher capital gains tax, which is calculated on your marginal tax rate – now increased to a maximum of 45%. This means the maximum effective capital gains tax increased from 16.4% to 18%.

The Budget Review also increased the annual maximum contribution to a TFSA from R30 000 to R33 000, however, the lifetime threshold will remain at R500 000.

We have recently focused on low-cost investment TFSAs, which give you the opportunity to invest on the JSE via platforms such as SatrixNow and #Invest.

The thing they have in common is that they use the EasyEquities investment platform, which is geared specifically towards TFSAs and offers investors a range of investment baskets with no minimum investment, which means
you can invest as little as R50 if you
want to.

You can select a single exchange-traded fund that tracks a specific market index such as the JSE Top 40, and pay an upfront fee of 0.25% with no additional platform fees.

Alternatively, you can opt for a basket of managed exchange-traded funds based on your risk profile – but these come with added fees. You will pay an extra 0.5% to 1% for these managed baskets. If you consider that exchange-traded funds already have an imbedded fee of between 0.35% to 0.55%, and add that to the management fee of up to 1%, you are getting close to the fees paid on some actively managed unit trusts.

EasyEquities will need to show that the managed baskets can deliver better long-term returns than just selecting a regular exchange-traded fund on its platform to justify the extra fee, but, for now, it is the only managed option with no minimum investment, which makes it attractive to those who want to invest on an ad hoc basis. Most unit trust investments start with a R1 000 lump sum or a R500 monthly debit order.

With all these low-cost options available, make this the year you start paying less to the taxman.

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September 15 2019