As financial professionals, we strive to help people make well-informed decisions to help maximise their wealth-building potential. One such opportunity lies in South Africa’s tax-free investments (TFIs), also referred to as tax-free savings accounts (TSFAs). Using a TFI as an investment vehicle and starting as soon as possible, both in terms of a person’s lifetime and within the tax year, can have meaningful benefits.
- TFIs come with a R500 000 lifetime limit. By starting to invest as early as possible, people can reach this limit sooner, which means that their money can work harder for them over a longer period, all while enjoying tax-free growth.
- The power of compounding can be amplified when people start investing early and stay invested for longer. Over time, the returns generated by their investments are reinvested, leading to possible accelerated growth and wealth accumulation.
- By investing as much as possible as early as possible in the tax year, people can maximise their investment’s exposure to potential market growth throughout the year. Waiting until the end of the tax year to invest can result in missed opportunities, ultimately affecting their long-term returns.
Postponing investing through a TFI can have a significant effect on a person’s wealth-building efforts.
Let’s look at a practical example.
Investing early in the tax year
Consider two people, client A and client B. Both begin investing R36 000 a year in a TFI at age 30. Client A invests at the beginning of every tax year, while client B invests at the end of every tax year. Assuming an average yearly return of 10%, let’s compare their illustrated investment values at age 50:
| Client A | Client B |
|---|---|
| R2 268 909 | R2 061 900* |
By investing early in the tax year, client A’s investment value is R206 190 more than client B’s at age 50. This difference highlights the opportunity cost associated with postponing investing within the tax year.
Guiding clients to begin investing using a tax-free investment as soon as possible is crucial for long-term success. Encouraging people to start early can help them reach the R500 000 lifetime limit more quickly, fully harness the power of compounding, and make the most of potential market growth throughout the tax year.
By understanding the opportunity cost associated with delayed investing, we can help people make better decisions to optimise their tax-free investments and secure their financial futures on their journey to success.
| Introduced in 2015, natural persons can invest in approved investment products, tax-free. These investments are subject to a lifetime investment limit of R500 000, and a yearly limit of R36 000 (2020: R33 000). The growth and the proceeds from a tax-free investment are fully exempt from South African tax, with no capital gains tax and no tax on dividends and interest. Investments of more than the yearly and lifetime limits are taxed at 40%. |
*Source: Momentum Wealth, January 2024. The example merely aims to show the difference between the two approaches. The effect of the cost of investing and the time value of money have not been taken into account.
Speak to your Momentum consultant or visit momentum.co.za to learn more about the Flexible Tax-free Option from Momentum Wealth.
Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider and part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.
