[TOP STORY] Ring-fencing income from tax

‘What many people don’t realise is that taxes, like fees, eat away at your investment returns and those really compound over time’: Kelin Pottier from 10X Investments.

SIMON BROWN: I’m chatting now with Kelin Pottier from 10X Investments, talking ring-fencing income from tax. Of course, this is doing it the legitimate, legal way, not the avoidance way. Kelin, I appreciate the early morning time. Monday [marks] the end of February, which of course is the end of the tax year for individuals. There are opportunities out there where we can sort of ring-fence income from tax. We’ve got the tax-free savings accounts, we’ve also got retirement annuities and Regulation 28 (Reg 28) products, which are totally legitimate ways to reduce tax into the future.

KELIN POTTIER: Good morning, Simon. Yes, absolutely. As you’ve mentioned, the tax year ends on February 28, and this is a real opportunity for investors to contribute any money that they have lying around, which they would like to invest in the future and shield their money from the negative effects of tax. What many people don’t realise is that taxes, like fees, actually eat away at your investment returns and those really compound over time.

SIMON BROWN: That’s actually a great point. In essence taxes are compounding out of your benefits, your profits, and [perhaps] we can get more smart around it. The one thing, and I’ve stressed this before, is folks mustn’t leave it for that absolute last minute. Don’t do it at four o’clock on Monday, because banks take time to move money around.

There are limits. The tax-free [annual savings limit] is still R36 000. The minister might change it tomorrow, but probably not. And of course, there are limits as well on your Reg 28 in terms of how much you can directly benefit from tax saving.

KELIN POTTIER: Correct. So as far as a tax-free savings account [is concerned], investors may contribute up to R36 000 per tax year, up to lifetime contribution limit of R500 000. As for your retirement annuities and Regulation 28 retirement funds, investors can actually contribute as much as 27.5% of their salary or R350 000 per tax year. The lower of the two of course is what applies. So investors really should make the most of that.

Although it is worth noting, as far as tax-free savings accounts go, investors should be really, really careful not to go over the R36 000 contribution limit as there’s a 40% tax penalty in the excess contributions.

SIMON BROWN: Yeah, that’s a good point. If you put extra into your Reg 28, that’s fine. You can roll it into next year. You don’t get the benefit this year, but you don’t get the penalty.

You also make a great point that actually there’s opportunity here, particularly in the tax-free space. Investing for a child, or perhaps a grandchild, [you are] turbo-charging investments by simply giving them decades of time.

KELIN POTTIER: The real benefit of tax-free investing comes over time. Every rand that is not paid away in tax is a rand that’s reinvested into your outlying investments, and that tax saving compounds over time.

If you were to just compare a tax-free savings account versus a traditional investment, within 20 years if you are maximising your tax-free contributions every year and investing in a high-growth index fund, you would actually have 30% more money than a traditional investment. In real rand that’s about half a million rand more.

SIMON BROWN: And that is proper chunky. That gets you into retirement with some serious extra cash in your pocket.

Kelin Pottier, product development specialist at 10X Investments, I appreciate the time this morning.

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