Maximising the benefit of a tax-free investment
SOUTH Africa has one of the lowest household savings rates in the world. To combat this, government has looked at options to promote a culture of savings and to incentivise such habits. One of the ways has been through the introduction of tax-free investment and taxfree savings accounts in 2015. Today, tax-free investments appear to be a popular choice, albeit an underutilised opportunity. Here are ways in which tax-free investments can benefit an investor portfolio.
Contribute wisely and within the limits
With tax-free investments, an individual can contribute up to R36 000 per tax year and up to R500 000 over their lifetime, where the interest, dividend and capital gains are earned tax free. It’s important to note that any amount exceeding the annual or lifetime contribution limit will be subject to significant tax penalties (taxed at 40%), which could erode the value of your investment. The contribution limit applies to all the tax-free accounts held in an individual’s name.
Even though you can access your tax-free investment at any time, withdrawals cannot be replenished. Tax-free investments are best-positioned for building wealth over the long term.
Using tax-free investments as part of a retirement savings plan
Due to the long-term nature of tax-free savings and the related tax benefits, accessibility and flexibility, they are often considered as part of a retirement savings plan. While a tax-free investment is not designed to be your sole source of retirement savings, when coupled with retirement fund savings, it presents an opportunity to boost your nest egg with a tax-free lump sum at retirement, along with the retirement fund savings to secure a regular annuity income.
The tax-free investment is also not subject to Regulation 28 (part of the Pension Funds Act), which limits the percentage allocated to certain asset classes. Thus, the tax-free investment offers more freedom around choosing investment options that align to an individual’s retirement savings goals and plans. With no restrictions in terms of asset allocation on tax-free investments, one could invest 100% in any asset class, for example global or SA equity, depending on one’s needs - ensuring adequate diversification across one’s portfolio.
Even though the contributions into the tax-free investment account are not tax deductible like retirement savings contributions, what makes the tax-free investment account a powerful investment vehicle is the compounding effect of the tax savings over time, coupled with the investment growth. With retirement savings contributions into a retirement annuity fund, a pension fund or a provident fund, you can claim back up to 27.5% of remuneration, or a taxable income up to R350 000, in a tax year. While both options present tax-efficient ways to save towards retirement, it is essential to view your investments within the context of your holistic financial plan.
Invest early and stay the course
When investing, it’s best to start early and remain invested for the long-term, as it offers more potential of boosting one’s wealth in the future. Even though the tax-free investment limits the contribution to R36 000 per year, the principle of a little can go a long way applies here. To demonstrate this, consider the example below, which illustrates the net worth of two people after 40 years - with one in a tax-free investment account and one in an investment account: • Investor A contributes R1 000 per month, from the age of 20 until retirement at 60 into a taxfree investment account.
• Investor B contributes R1 000 per month, from the age of 20 until retirement at 60 into an investment account.
After 40 years, both investors contributed a total of R480 000, but the total investment value of investor A would be R3.491 million, while that of investor B would be R3.130 million. This demonstrates the power of saving money in a tax-free investment account.
(Assumptions: annual growth of 8%, marginal tax rate of 30%, investor B used CGT exemption.)
Augment your portfolio with tax-free investments
In addition to the tax benefits, there are many reasons why tax-free investments should be part of any financial portfolio. Tax-free investments can be used as a strategic part of your financial, retirement and estate planning. Furthermore, it affords you the opportunity to diversify your portfolio exposure across asset classes (bonds, cash, equities, etc) with no limits or restrictions, in a way that is suited to your unique financial needs.
Make your move now - consult with your accredited financial adviser on maximising tax-free investments to bolster your financial portfolio.
For more information about the PPS Tax Free Investment Account, visit https://www.pps.co.za/ invest/invest-tax-free
THE Notorious B.I.G., the rapper whose deepbellied delivery thrust hip hop forward and earned him designation as one of rap’s alltime greats, has proven a fount of fascination since his shock murder at age 24.
Now Brooklyn’s favourite son is the subject of an intimate documentary entitled Biggie: I Got a Story to Tell that draws upon candid interviews with his closest family members and friends, set for release on March 1 via Netflix.
The feature-length look into the astronomic ascent and heartbreaking death of the artist born Christopher Wallace comes nearly a quarter-century after he was gunned down in a drive-by shooting as he visited Los Angeles on March 9, 1997, having released just one studio album, Ready To Die, in his lifetime.
Its sequel, Life After Death, came out 16 days after the rapper’s slaying.
The estate-approved film, co-produced by his mother, traces Biggie’s brief but explosive life: a Catholic schoolboy raised by a Jamaican immigrant in Brooklyn’s Clinton Hill neighbourhood, who went from king of the corner selling crack to overnight rap sensation with indelible influence.
It renders a sympathetic portrait of a man who desired the trappings of fame and success but also security for his family, an artist’s artist whose creative energies made him the pride of his city.
“He had a life that had such a profound effect,” said music mogul and documentary co-producer Sean Combs, who then went by Puff Daddy and now is known as P. Diddy.
“It really gave birth to the future of hip hop.”
Featuring sweeping pans of 1980s and 1990s New York, Biggie also takes viewers to Trelawny, Jamaica, the home of the musician’s mother Voletta that he visited each summer as a child, where his 96-year-old grandma still resides.
His friend Hubert Same described how a young Biggie would return from those trips to the Caribbean with different types of music – country, reggae and funk – and new sounds that helped him develop a producer’s ear for beats and rhythm.
Donald Harrison, a neighbour, mentor and jazz saxophonist, recounted Biggie crafting rhymes that mirrored the snare drum of a bebop beat, training that played into the artist’s singular viscous flow.
“You can hear that Notorious B.I.G. was accenting those notes and rhyming in a way that exudes all the finer qualities of a bebop drum solo.”
“It’s incredible.”
The documentary also parses Biggie’s seedier side, with frank interviews from the friends he made as a teenager in their years together selling drugs.
Seeing his protege’s focus divided, Diddy describes asking Biggie to choose between music and the quick cash made dealing.
A friend, Damion Butler, recalls a story of Voletta cleaning her son’s room and scraping a plate of crack into the garbage, asking: “Yo, why are you leaving all these hard mashed potatoes in the plate?”
The rapper’s mother describes her son kneeling at her bedside one morning and telling her he was going to chase a future in music.
“And who is gonna help you, Christopher?” she says she asked.
“He said, ‘This guy named Puffy,’” Voletta laughs. “God damn Puffy.”
The shooting death of Biggie’s friend
Olie is among the threads that carries the documentary from the rapper’s humble beginnings to the top, shock and grief that “shook” the artist in a way that his friends and lovers said overwhelmed him again when fellow rap icon Tupac Shakur was murdered in 1996.
The popular narrative says the pair were slain as part of a beef between their labels, but some music historians believe the coastal rift was exaggerated.
The documentary plays it down as rumour-fuelled, as did Biggie in footage of his final interview in California on March 5, 1997.
After dismissing chatter over a rap clash as hearsay, Biggie says his plan is to “continue to keep makin’ those songs that make you dance and make you groove and have kids.”
“We’re just gonna do our thing forever.”