Marc asks: I run my own one-man home-based business, which often generates more than R50 000 of income a month. I have few expenses, which can be written off against taxable income — what are the most tax-efficient ways of investing my earnings?
Maya replies: I sit in a very similar situation as I have my own media business with very little input costs. I have taken out a retirement annuity.
Historically I avoided the product because of high costs, lack of transparency and inflexibility, but with the new asset management products that allow you to invest directly and have lower and more transparent fees, it made a great deal of sense.
Firstly, I can invest up to 15% of my before tax money. For example, you would be able to invest R7 500 a month. That equates to R4 500 of after-tax money (if you pay 40% tax), so effectively the Receiver of Revenue subsidises your contributions by R3 000 a month.
Then there is no capital gains tax paid, and this really makes a big difference. For example, if you invested R7 500 for 20 years and the fund delivered 10%, then you would have R5,6-million saved. Of that R3,8-million would be capital gains and therefore taxable. All interest earned in the fund is also tax-free.
The downside is that you can never access the funds until age 55 when you have to convert two-thirds to a life or living annuity.
My view on that is that I would want to have some sort of annuity pension on retirement anyway and I like the discipline of not being able to access the funds.
If you emigrate you can cash it in but you would have to pay tax based on the retirement tax tables.
The key is costs. Look for a good fund manager that keeps costs low — ask about the Total Expense Ratios.
Because your income fluctuates, set your monthly RA premium at about 10% of your average income and top it up at the end of the tax year to take full advantage of your tax benefit.
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