By Rupert Giessing, Head of Product Development, PSG Wealth
If you’re one of the lucky ones among us then your year-end bonus payment is fast approaching, or may have even already happened. If there’s anything left after you’ve bought those essentials you’ve convinced yourself to get, it can be tempting to spend it all on festive pleasures. You’ve put in a year of hard work, and deserve to reward yourself for your efforts. But remember that you can reward yourself more meaningfully in the longer term, by investing part or all of your bonus for further growth.
Taking advantage of tax efficient investment products like tax free savings accounts (TFSAs) and retirement annuities (RAs) is a great way of making your money go as far as possible. As opposed to normal share portfolios or standard unit trust investments, these products offer a way of growing your money without having to sacrifice part of this growth to capital gains or dividend withholding tax.
The recently introduced TFSA has the unique advantage of offering tax-free investment returns. It is a flexible investment product designed for growth and can be easily tailored to your individual needs and risk tolerance.
While the tax implications of this investment method are minimal, other conditions apply. You can invest a maximum of R30 000 a year (by making lump sum or debit order investments) and R500 000 over the lifetime of your investment. A benefit, or disadvantage depending on your perspective, of a TFSA is the freedom it gives you to withdraw funds at any time. It probably goes without saying, though, that your investment will bear the most fruit and show the best growth with a long term investment horizon.
Certain investment platforms will allow you to choose to invest in a broad range of the available unit trusts, giving you the opportunity to benefit from almost any asset class. It may also be possible to switch between unit trusts easily and cost effectively at any time.
Disciplined, long-term investing
A basic definition of an RA is an instrument that allows you to accumulate and grow your savings so that you can earn an income from the proceeds when you retire. All your investment growth is tax free, proceeds up to a certain amount at retirement are tax-free and you can claim your investment contributions back from tax, up to a specified limit.
You can make lump sum or debit order investments (or even ad hoc contributions with certain providers) and must legally remain invested until age 55, making an RA one of the most disciplined types of investment instruments available on the South African market.
While an annual bonus may be a bit of a rarity nowadays, it’s essential that you use it responsibly and thoughtfully if you’re one of the lucky ones. Your future self will thank you more for financial certainty than an old pair of shoes that were lovely a long time ago.
Source: Claire Densham Communications