Articles Tagged with: Unit trusts
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Investing: Tax-free investments

Tax-Free Investments

On the 1st of March 2015, the National Treasury introduced tax-free investments to encourage individual investors to save. Tax-free investments are free from all tax, this means:

  • No tax on interest or other income
  • No dividends tax
  • No capital gains tax on withdrawal from your investment

National Treasury has placed limits on the amount that an investor can save in a tax-free investment. The total annual contribution in one tax year may not exceed R33, 000. The total lifetime contribution may not exceed R500, 000. If an investor has more than one tax-free plan, the maximum of R33, 000 per tax year applies to all their tax-free plans and not per plan.

It is important for investors not to exceed these limits as the South African Revenue Services will impose a 40% tax on any amount above the annual or lifetime allowance. If an investor contributed R40, 000 in a tax year the R7, 000 above the threshold would be taxed at 40%. (R7, 000 * 40% = R2, 800 tax would be payable to the South African Revenue Services.)

Investors may nominate one or more beneficiaries to receive the proceeds of the tax-free investment. This means in the event of the death of the investor, the investment will not incur executor’s fees and the investment will be paid to the beneficiaries.

Earning ‘interest on interest’

The mechanics of a tax-free investment work exactly the same as a unit trust investment. The investor is free to choose how much risk he or she wishes to assume in the investment. Unit trust funds that have a focus on providing investors with a growing income can be particularly beneficial in a tax-free investment. As the interest and dividends are earned they are reinvested into the tax-free investment. The compounding effect of this over time will provide the investor with meaningful long-term returns.

Let’s look at a practical example of how a tax-free investment could help supplement a tax-free income in retirement.

Annie is 20 years old and wants to invest in a tax-free investment. Annie realises her investment needs to increase ahead of inflation and invests in a fund that will deliver returns of 10% per annum over the long term.

After 15 years of contributing to her tax-free investment, Annie finally reaches her lifetime contribution limit of R500, 000. Her investment is now worth R1, 174, 095. Annie is too young to consider retiring and so chooses to leave the funds to continue to grow for another 20 years.

Annie is now 55 years old and would like to use her tax-free investment to supplement her income in retirement. Annie’s tax-free investment is now R7, 898, 724. Annie decides that she would like to withdraw 5% of the capital to provide her with an income. Annie will receive R400, 000 tax-free.

Isn’t it time that you started contributing to your tax-free investment? For more information or to start your tax-free investment contact us today!

Investing: Unit Trusts

What are unit trusts?

A unit trust is an investment which allows a number of investors to pool their funds together to gain investment exposure to many different assets classes such as shares, property, bonds and money market instruments.

Every unit trust fund is divided equally into portions called units. The price of each unit is determined based on the value of all the investments in the fund. These funds are then managed by an investment professional who attempts to grow the underlying assets in the investment.

Different unit trusts have different fund objectives, some unit trust funds are focussed on providing a reliable monthly income whilst other unit trust funds are focussed on delivery long term capital growth. Based on the mandates of the fund, the investment manager attempts to earn returns through capital growth, or income or a combination of both.

Every unit has a value. An investor is able to purchase units based on this value. If the unit price is R1 per unit, an investor can purchase units based on that value. The price of this unit fluctuates and can go up as well as down. If an investor purchases R10, 000 worth of units at R1 then he has 10, 000 units.

Should the price of this unit increase to R2 the value of the investment will be R20, 000, similarly if the unit price was to decrease by 10% then the value of the investment would decrease by 10%.

Because funds are pooled, investors are able to gain access to underlying assets at reduced costs. Unit trust funds provide for diversification as not all your funds are concentrated into one sector or specific share or commodity. Unit trusts are easily accessible and can be purchased or sold, providing for liquidity for investors. From as little as R500 per month Investors are able to gain access to unit trusts.

Unit trust investments offer investors a chance to invest in a wide selection of underlying assets, which provides diversification yet allows the investor the chance to partake in assets that might not be readily accessible or affordable to an individual investor. Investors can have confidence that their funds are being managed by an investment professional in accordance with the specific fund mandate.

For more information or questions on how to invest in unit trusts please contact us.