How to structure your portfolio with a mix of tax-free products

By Janice Roberts

South Africans who wish to build an investment portfolio should get professional advice to ensure that they take advantage of all the available tax benefits and get a good return on their investment.

This is according to Fedgroup Chief Financial Officer Sheldon Friedericksen, who points out that the services of a financial advisor should be employed to help potential investors construct a strong portfolio that will yield maximum benefits and returns.

“Tax is a big consideration in an investment portfolio, along with various other factors. However, it’s also currently a no man’s land, littered with legacy tax exemption policies – which have not been adjusted for several years – that could prove tricky for investors to navigate,” he says.

Frederickson points out that investors could benefit from the interest exemption, which stipulates that interest from a South African source, earned by any person under 65 years of age, up to R23,800 per year, and persons 65 and older, up to R34,500 per year, is exempt from income tax.

Investors can also consider tax-free investments, capped at R33 000 per tax year, with a lifetime limit of R500,000. The returns or growth earned on these investments are completely tax free.

At the same time, tax benefits should not be the only consideration when structuring an investment portfolio and Fredrickson says investors should tread carefully when considering tax-structured products.

While many structured products provide capital protection and geared returns, these offerings come with their own features, often making it difficult to know whether a particular investment product is right for an investor’s needs.

Another option, he says, is investing in an endowment fund or policy, where tax is paid by the financial services provider through which the investment is made, on behalf of the investor. The tax will be recovered from the investor’s portfolio, but these tax rates are lower than the top marginal rates for individuals.

“If you are a high-net-worth individual, who wishes to invest for five years or more, then an endowment is something you should consider,” says Frederickson.

However, he advises that the best way to structure a portfolio would be to take advantage of the current legislation and include a mix of tax-free products, tax-structured offerings and endowments.

Other investment vehicles that investors could consider include sustainable investing products and venture capital investments that offer accelerated tax deductions and minimise tax liability in the long run.

“The main thing is to know what you are investing in. Know the risks you are willing to take and what you are getting into. Also, know your financial adviser. Are they an independent adviser or do they represent a particular product? That could make all the difference,” Frederickson concludes.

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