Wider return differences between investments

The capital gains tax increase announced in this week’s Budget will make discretionary investments under-perform retirement fund investments and tax-free savings accounts by an even wider margin, retirement consultants in the Sanlam group say.

Retirement fund investments remain the most tax- and costefficient investment vehicle in South Africa, they say, but the changes in CGT and tax rates do not make a very big difference to the outcome you will achieve over a very long term.

Kobus Hanekom, the head of strategy, governance and compliance, Freddy Mwabi, an actuarial specialist, and Ryan Campbell-Harris, an actuary, at Simeka Consultants and Actuaries, determined the effect that the 2016 Budget will have on retirement fund investments relative to tax-free investments and unit trusts.

The capital gains tax inclusion rate has increased from 33.3 percent to 40 percent. This increases the maximum effective rate from 13.7 percent to 16.4 percent. The exempted amount will increase from R30 000 to R40 000 a year.

The Simeka consultants calculated the lump sum after 20 years for a provident fund member who earns R10 000 a month and whose employer contributes R1 000 a month escalating at the inflation rate plus two percentage points after tax. They assumed an annual return of 11 percent (inflation plus five percentage points).

They then considered what the same investor would have as a lump sum after contributing R820 (R1000 minus tax) to a tax-free savings account or a unit trust fund earning the same return and with the same annual increase in the contribution.

Similar costs were assumed, although investment platform, retail asset management and advice fees can make investments more expensive than retirement funds.

The final investment amount was nine percent lower in the tax-free savings account and 16 percent lower in the unit trust fund than in the provident fund – 0.6 percent less than before the CGT change.

They also ran the calculations for a person on a much higher income, R800 000, paying tax at the highest marginal tax rate. This investor was also assumed to be contributing R1 000 to the provident fund and R590 after tax to the tax-free savings account and the unit trust fund.

The outcome was that the tax-free savings account delivered a lump sum 27 percent lower than that of the provident fund investment and the unit trust was 33 percent lower.

The consultants say in this calculation the CGT payable was 15 percent more after the 2016 Budget but it made only a 0.4 percentage point difference to the unit trust net return in the comparison over the longer term. - Staff Reporter