Saving for retirement with a tax-free investment

The true benefit of tax-free investments is really unlocked if they are considered as part of a long-term investment strategy.  

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One of the biggest challenges that most South Africans face in their lifetime is insufficient savings for retirement. Many of us are affected by this when our parents have not saved adequately for retirement. We can avoid this additional responsibility on the next generation by making sure that this generation save adequately for their retirement.

The positive news is that South Africans have various investment options available to them to optimise their retirement savings. Retirement funds are investment vehicles that were specifically designed with this in mind. However, an investment vehicle that is often overlooked when it comes to saving for retirement is a tax-free savings option, like our Flexible Tax-free Option. These investment options can offer material benefits over the long term. In fact, the true benefit of tax-free investments is really unlocked if they are considered as part of a long-term investment strategy.

To illustrate this, we can compare the proceeds from a tax-free investment to an equivalent taxed investment vehicle. As an example, over 10 years a tax-free product can offer almost 10% higher accumulated value if compared to a taxed investment vehicle, assuming a marginal tax rate of 30%. And this can increase to almost 50% higher accumulated value over a 30-year period.

*Source: Momentum Investments, March 2021

This begs the question: what is the most optimal use of your tax-free contribution limits? Although the effect on short- to medium-term investment goals are by no means something to ignore, the benefit is progressively more if a client remains invested for a longer investment horizon.

From the above, it is clear that a tax-free investment can offer material benefits if considered as part of a client’s retirement planning strategy. This is especially relevant for investors who have already contributed the maximum of R350 000 per year to their retirement fund savings, by supplementing their retirement savings with a tax-free product.

Martin Riekert, Head of Retail Investments at Momentum Investments.

Tax-free savings products also offer additional flexibility – most notably on asset allocation requirements. Unlike retirement fund solutions, a tax-free savings solution is not restricted to Regulation 28 requirements. You can therefore use this solution to tweak the overall asset allocation of your client’s investment portfolio, especially if there is a need for higher allocation to appropriate growth assets.

It is important to note that the effect on your clients’ investment will, as always, depend on their unique financial situation. We believe that financial advice plays a critical role to understand these circumstances and develop an investment strategy that addresses your clients’ personal investment goals.

Investing is personal and by partnering with a credible investment platform – like Momentum Wealth – you can execute on this personalised investment strategy. Momentum Wealth offers a wide range of underlying investment solutions – one of the widest ranges in the industry – that you can use to construct an investment portfolio that suits your client’s personal investment strategy and retirement plan.

Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider and part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406). Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406). The Flexible Tax-free Option is a life insurance product, underwritten by Momentum Metropolitan Life Limited, a licensed life insurer under the Insurance Act and administered by Momentum Wealth (Pty) Ltd.