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Reasons why you require a tax-free investment

Reference: Published by Partner, 15 February 2023

https://businesstech.co.za/news/industry-news/664941/heres-why-you-need-a-tax-free-investment/?utm_source=everlytic&utm_medium=newsletter&utm_campaign=businesstech

A tax-free investment is a no-brainer given its benefits, but by managing it strategically, you can increase its value. Now is the ideal moment to invest and maximize your benefits because the tax year ends on February 28, 2023.

The benefit of a tax-free investment that stands out the most is that you don’t have to pay any local taxes on your investment returns, either while you’re investing or when it pays off. Your interest income, dividends, and capital gains are all free of municipal taxes.

While the government has provided all South Africans with access to this wonderful advantage, we think the real value resides in knowing how to maximize your tax-free potential. According to our analysis, over the long term, using four essential tactics, you might quadruple the returns on a given taxable investment.

Strategy 1: Observe the first-in, last-out rule.

When we say “first-in,” we mean to use your tax-free limit first before deciding on any other type of investment. You can start investing with Coronation with as little as R250 per month or an annual lump sum of R5,000, up to a maximum contribution of R36,000.

By “last-out,” we mean to keep investing over the long haul. With every additional decade that you remain invested, the force of compounding allows your investment to potentially expand tenfold. By avoiding the need to access or withdraw the money you’ve deposited in a tax-free investment, we think you may fully benefit from tax-free investing.

In other words, don’t use it as a savings account for major purchases like a car or holidays or an emergency fund.

Strategy 2: Invest in a multi-asset fund that emphasizes growth.

It’s crucial to realize that restrictions on geography or asset classes do not apply to tax-free investments, which means that long-term investors may want to explore investing entirely in stocks. The highest predicted returns are offered by this asset type over the long term.

To navigate market ups and downs across several decades, a less volatile experience could be desired for the majority of investors. As a result, selecting a growth-oriented multi-asset fund like Coronation Market Plus is your best bet for staying invested and generating returns that are significantly higher than inflation.

Since its launch in 2001, Coronation Market Plus has catered to the demands of risk-takers looking to increase their long-term capital outside of retirement portfolios.

As seen in the graph below, Coronation Market Plus has generated an annualized return of 14.3%, which is significantly higher than inflation, which is now at 5.7%.

It is noteworthy that, during this time, the Fund has beaten the 13.7% performance of the JSE All Share Index, despite never having a 100% equity investment. (All performance data is as of December 31, 2022).

Strategy 3: Try to hit your lifetime cap as quickly as you can.

Your yearly tax-free investment limit, which is presently R36 000 per year and R500 000 per taxpayer in total, should be used as soon as feasible, according to history. By doing this, you can extend the time over which you can profit from compound growth by allowing the taxes you avoid to stay invested for a long time.

The higher rate of compound growth on your tax-free investment is what makes it so much more potent than an investment in a taxable unit trust. This can double the value of your investing nest egg over the greatest feasible time span, as explained in Strategy 4 below.

Strategy 4: Create riches for your young children.

A hypothetical example (see figure below) that highlights its potential if used on your child’s behalf as early in life as feasible can help you better grasp the life-changing impact a tax-free investment can have on their lifetime.

Consider making the maximum annual contribution for your child (R36 000) in a tax-free investment from the time of the child’s birth. Before your child reaches the age of 14, you will have spent the entire lifetime limit of R500,000.

According to our study, which is predicated on a few assumptions, the value of the tax-free investment will be 22% more than the equal taxable unit trust investment if you hold onto the funds there until your child becomes 18 years old. By the time you reach age 30, the gap increases to 42%, and by the time you reach age 65, the investment will be worth significantly more than the equivalent taxable unit trust investment.

These findings demonstrate that by resisting the urge to withdraw money from a tax-free investment, a nest egg is created, which, depending on when your child decides to withdraw, might be used to pay for university education, purchase a first home, or, ideally, invest in retirement.

The amazing potential of compounding over extended periods is clearly demonstrated by this theoretical exercise. An investment worth R17 million in today’s money can be made by age 65, for instance, by investing R500 000 over the course of 14 years and then doing nothing for 41 years.

Start your adventure with Coronation right away if you don’t already have a tax-free investment.

As we can see, there are many advantages to investing tax-free. But what’s most important is that you take the tactics into account to maximize your investment. Therefore, why Coronation?

  • By opening a tax-free investment with Coronation, there are no setup or administrative fees involved.
  • Start investing with us today for as little as R250 via a monthly debit order, or contribute one big payment of R5,000 to R36,500 annually.

Contact your financial advisor, if you have one, or visit the tax-free investment website by the end of February 2023 to choose the funds that best meet your needs.