The end of the tax year has once again come and gone, and with it the wave of retirement annuity top-up and tax-free savings account (TFSA) advertisements and press releases. Given the dismal investment culture in South Africa, all advertisements and media articles encouraging people to invest are very welcome. It always interests me though how, come 1 March of each year, these advertisements tend to disappear.
Maximising any tax benefit is an important consideration, as is acknowledging that the earlier you start earning investment returns, the earlier those investment returns start compounding. This point is best illustrated by way of an example.
TFSAs provide South African investors with a wonderful opportunity to save towards a specific goal or to supplement their retirement savings. As TFSAs are not subject to income or capital gains tax, they provide a convenient and flexible way to accumulate savings over time. Find out more here.
Retirement annuities provide investors with a tax efficient1 way to save for their retirement and to preserve benefits for retirement.
Figure 1 shows the benefits of investing in a TFSA at the earliest opportunity (i.e. in March at the beginning of each tax year) over both a recurring monthly contribution and the latest possible opportunity (i.e. in February at the end of each tax year). In each case we have assumed the investor invests their full annual allowance of R33 000 into a TFSA, with the Investec Opportunity Fund as the underlying investment option. The only difference is that investor 1 does so at the start of the tax year, investor 2 invests via a R2 750 monthly debit order and investor 3 makes a contribution at the end of the tax year. They all invest until they reach their lifetime limit of R500 000 in the 16th year of investment, based on the current annual allowance.
Figure 1: Investing early is the key to long-term success
Source: Morningstar and Investec Asset Management, 28.02.04 to 28.02.19. Each scenario represents total contributions of R495 000 made over the period. Performance is shown NAV to NAV, net of fees with gross income reinvested for the Investec Opportunity Fund, A class. Investment performance is for illustrative purposes only to show the impact that the timing of TFSA contributions has. Monthly shows contributions of R2 750 per month throughout the period. In advance shows contributions made at the start of each tax year and arrears show contributions made at the end of the tax year. A class inception date: 02.04.00. The TER of the Investec Opportunity Fund, A class is 1.50%, and highest and lowest 12-month rolling returns since inception is 43.8% (31.07.05) and -15.7% (28.02.09), respectively.
Simply investing in the Investec Opportunity Fund via a TFSA at the beginning of each tax year, as opposed to the end of the tax year results in as much as an additional 14% payout after 15 years. And for those who cannot commit to an investment of R33 000 at the beginning of each tax year, Figure 1 also shows it is still more financially rewarding to initiate a monthly debit order, as this method results in an additional 7% compared to investing R33 000 at the end of each tax year. A clear example of the early bird catching the worm!
It is also important to note that these benefits only accrue to those TFSA investors who remain invested for the full investment period. Remember that the TFSA allowance is essentially a ‘use it or lose it’ allowance – if you withdraw some or all your TFSA investment, you cannot reinvest the amount that you have withdrawn.
By investing in a retirement annuity and/or a TFSA with Investec IMS, investors benefit from a competitive fee structure, transparent pricing and a wide range of funds from Investec Asset Management.