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Quarterly insight

15 December 2020

Quarterly insight

Tax factors to consider on your wealth creation journey

Tax considerations generally add significant complexity to investment decisions. It is therefore useful to consult a financial adviser (and, in some cases, a tax specialist) when making decisions around tax. However, there are a few basic principles and specific product-related tax features that should be considered. This article provides a brief overview of these.

Creating wealth takes time – it is a process that requires consistency and discipline over the long term. And in this process, there are various products with tax incentives you can leverage to help you reach your financial goals. So, as part of your financial plan, consideration needs to be given to the tax implications of different products.

Firstly, a few basic principles

Given that tax is a certainty, tax implications should generally not be the key driver of your investment decisions. Instead, investment decisions should be made based on your needs and desired outcomes. Once the investment decision is made on this basis, the most efficient tax structure for achieving these outcomes can then be chosen.

A common example of investors putting short-term tax considerations before long-term fundamental investment decisions is when an investor postpones the realisation of capital gains tax (CGT) by not switching to underlying funds suited to their needs. The CGT will be payable at some point, and postponing its realisation just creates a false sense of the investment value.

Remember too that tax considerations should extend beyond just thinking about the impact of your investment products – consideration should be given to all your investments, sources of income and deductions. They should also include thinking around holistic retirement planning, medical aid contributions and estate planning.

Tax implications for different investment products

The table that follows provides a few key insights on the tax implications and rules of the major investment products.

Product type Tax considerations specific to each product
Tax-free savings accounts (e.g. PSG Wealth Tax Free Investment Plan)
  • All investment returns within a tax-free savings account are exempt from tax. This makes these vehicles attractive for long-term saving and for supplementing your savings in retirement.
  • Contributions to a tax-free savings account are limited to R36 000 per year and R500 000 over the total lifetime of the product.
  • It is important to note that any contributions in excess of these limits will be taxed at 40%. Product providers help you limit the contributions into your tax-free savings account.
Retirement annuities (e.g. PSG Wealth Retirement Annuity Fund)
  • Retirement annuities and the tax concessions around these products have been designed to help you save specifically for retirement.
  • Amounts contributed to a retirement amount are tax deductible up to a maximum of 27.5% of taxable income, or R350 000 per year (whichever is higher).
  • All investment returns within a retirement annuity are exempt from tax.
  • The proceeds of the death benefit of your retirement annuity are taxed at the rates indicated in the SARS retirement fund tax tables.
  • When you retire, you can take up to a third of the retirement annuity savings in the form of a lump sum, with the first R500 000 of this amount being tax free.
  • The remaining amount must be used to generate a regular income by purchasing a living annuity.
Living annuities (e.g. PSG Wealth Equity Linked Living Annuity)
  • Income from living annuities are taxed using the SARS tax tables.
  • This means that only the income you draw from your living annuity is taxed, and not the underlying investment returns within your living annuity.
Endowments (e.g. PSG Wealth Endowment)
  • An endowment provides a tax-efficient investment vehicle, whereby clients that fall into the higher tax brackets are able to benefit from the lower tax rate applied to endowments.
  • Investment returns on endowments are taxed at a flat 30%.
  • Keep in mind that endowments have restrictions on withdrawals within the first 5 years.
Discretionary investments (e.g. unit trust investments such as the PSG Wealth Voluntary Investment Plan and share portfolio investments)
  • Discretionary investments do not carry any “built-in” tax benefits.
  • When you invest in a unit trust fund, you become liable for tax on the income generated from the investment at your marginal rate of tax. Other taxes you will need to consider include dividend withholding tax (DWT) and CGT.
  • When you sell units, or switch between funds, you won't need to pay any CGT on the first R40 000 worth of capital gains.

 

Tax-savvy investing

It is important to think about the tax aspects of different investment products in creating wealth over the long term. Have you planned to maximise your tax-efficient savings this tax year? You only have until the end of February to take full advantage of this opportunity before tax year-end, and PSG Wealth offers several products with great tax incentives to help you achieve your financial goals. Tax-efficient savings should be part of your holistic financial plan. Speak to your financial adviser to determine exactly which products within each investment product is best suited to you.

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The Wealth Perspective - Fourth Quarter 2020

Author
author

Jan Van Der Merwe

Head of Actuarial and Product
At PSG Wealth
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