Tips for buying a second car
ENDOWMENTS: GREAT VEHICLES FOR WHEELS AND TAX
Zipho Mnyande, a financial consultant with Alexander Forbes Retail in Johannesburg, advises a reader who wants to save up to buy a second car.
Question: I would like to start saving for a second motor vehicle. My current car is paid off and still in very good condition, so I don’t think I will need to replace it within the next five years.
I would therefore like to save the money that I was paying towards my monthly instalments to eventually buy a second motor vehicle for cash. Therefore, my savings term would be at least five years. I have a money market fund with Allan Gray at the moment, but I find it difficult not to use these savings for other larger expenses. I would therefore prefer to use something that does not allow easy access to my savings. What would be best?
A: The first step one should take is to identify the investment objective. In this case that is a car, with an assumed cost of R300 000 at the end of a five-year term horizon. It is important to understand this time horizon as well as your appetite for risk to decide on the most suitable investment vehicle.
Some of the most popular after-tax investment vehicles include endowments, unit trusts and the tax-free savings accounts. These vary in terms of accessibility and tax implications.
For a client who wants to lock their investment for a five-year period, an endowment would be a vehicle to consider. We do, however, have to take into account their marginal tax rate when making this decision. This is because endowments are taxed within the fund at a set rate of 30%. This benefits investors who have a marginal tax rate greater than that.
Because the money in an endowment is taxed within the fund, your withdrawals are tax free. In order to get this benefit, however, endowments have a minimum investment time horizon of five years.
You would be able to choose different underlying investments within the endowment, and given your time horizon, a moderate-to-balanced portfolio will most likely be appropriate.
It is important to get an understanding of the tax implications from your financial advisor.
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