Invest tax-free – your annual reminder

Each February, investors are bombarded with the same message about taking advantage of their annual tax-free allowances before the tax year closes. We, too, keep beating this drum.

LET’S START WITH WHY TAX-FREE

All South African residents are eligible to invest tax-free, including minors. You can invest up to R36 000 per tax year, to a lifetime total of R500 000.

With a tax-free investment, you don’t pay any local tax on your investment growth that would otherwise be taxed (i.e. interest or other income, dividends tax, or capital gains) for the duration of your investment period. You also don’t pay any local tax when your investment pays out. Just remember not to contribute more than the annual or lifetime limits, as any excess contribution will be taxed at a rate of 40%.

WHY WE CONTINUE BEATING THE ‘LONG-TERM’ DRUM

The power of compounding means that your investment has the potential to grow exponentially the longer you remain invested.

This makes a tax-free investment even more powerful than an investment in a taxable unit trust. When you harness the life-changing effect of the higher compound growth in a tax-free investment over time, you can double the value of your investment in real terms-take for example the following scenario:

• You invest the maximum annual amount (R36 000) in a tax-free investment for your child from birth. By continuing to do so each year, you reach the lifetime limit of R500 000 before your child turns 14.
• Using reasonable assumptions (as detailed in Figure 1), our analysis shows that if you remain invested until your child turns 18, the value of the tax-free investment will be 22% greater than the equivalent taxable unit trust investment. By age 30, this difference widens to 42%, and by age 65, the investment would be more than double the value of the same taxable unit trust investment. 

This scenario clearly shows that by resisting the temptation to disinvest, your investment has the opportunity to grow into a sizeable sum of money. And dependent upon the point at which you disinvest, this money could be used to finance tertiary education, buy a first home or, ideally, set your child up for retirement.

But what’s clear is that as each decade passes, the power of compound growth intensifies. By investing the lifetime sum of R500 000 over 14 years and then doing nothing for 41 years can result in an investment worth R17 million in today’s money by age 65.

WHAT FUND SHOULD I USE FOR MY TAX-FREE INVESTMENT?

It’s important to understand that geographical or asset class constraints do not bind tax-free investments, meaning that long-term investors could consider being fully invested in equities (the asset class with the highest expected returns over time). 

However, for most investors, a less volatile experience may be the preferred route to navigating market ups and downs over multiple decades. As such, choosing a growth-oriented multi-asset fund such as Coronation Market Plus is the most likely option to help you remain invested while achieving returns well above inflation.

Since its inception in 2001, Coronation Market Plus has met the needs of aggressive investors aiming to build long-term capital outside of their retirement portfolios. As shown in Figure 2, Coronation Market Plus has delivered an annualised return of 14.3%, which is well ahead of inflation at 5.7% per year. Worth noting is that, over this period, despite never being fully invested in equities, the Fund has outperformed the JSE All Share Index’s performance of 13.5%. (All performance figures quoted are as of 31 December 2023.)

IF YOU DON’T HAVE A TAX-FREE INVESTMENT, START YOUR JOURNEY WITH CORONATION TODAY

Prioritise taking advantage of your annual tax-free investment allowance as early as possible. Doing this allows the taxes you save to remain invested for the long term so you can reap the benefits of compound growth over the longest possible period.

SO WHY CHOOSE CORONATION?

• There are no initial or admin costs attached to opening a tax-free investment with Coronation.
• You can start investing with us from as little as R250 via a monthly debit order or make lump-sum investments from R5 000 to R36 000 per year.

To select the funds that suit your needs, speak to your financial adviser, or go to our tax-free investment page before the end of February 2024.

Disclaimer
SA retail readers
Comprehensive fact sheet