Consider tax-free savings for your children
Most parents want to give their children the best start in life when it comes to financial support.
The earlier you start to provide for this, the better.
Not only can making regular investments generate a significant amount over time, it can also help you reduce a potential future tax liability.
In this article, we look at tax-free savings accounts as a simple and transparent investment option.
Try something different
You can contribute up to R33 000 a year (with a lifetime limit of R500 000) into a tax-free account without paying tax. That is 0% tax on interest, dividends or capital gains. Your money will grow faster compared to a regular investment because you do not pay tax on the investment return.
You do not have to contribute the whole R33 000 at once, you can do it through a monthly contribution or make small lump sum contributions. The money can be accessed at any time.
There are limited exit penalties, mostly from savings products, that have to be held for a term, and the thing to remember is that once you have contributed the full R33000, if you withdraw, you cannot replace it.
While it may seem strange putting money into an investment that your child will likely only access later in life, it could be a move that sets them up for a more secure long-term future than many of us face today.
If you assume a monthly contribution of R2 750 (increasing at 6% a year) and an average compound annual growth rate of 13% (long-term returns on South African shares), within 12 years, your child would have accumulated R1 170 465.
But the most important way to measure your wealth is in terms of returns after inflation. This is referred to as a real return.
This can also be thought of as the "net return". If you add the South African average annual inflation rate of 6% on the above assumptions, it will take you 18 years to make R1089456 after deducting inflation. That is still a significant sum of money, and saving tax-free over a long term makes it easier to reach that difficult to get to R1-million mark.
The universe of unit trust funds is broad and there are options to satisfy all your investment needs.
We usually advise that you consider shares as an underlying investment, if you are investing for any period more than three years.
You have until February 28 2019 to use your R33 000 tax-free allowance.
If you do not have any new money to invest, consider switching investments from other accounts (but not retirement funds which are tax free and tax deductible) into a tax-free savings account.
This is a common way to make the most of your tax-free allowance, but it may result in you incurring capital gains tax if you sell an existing investment with a capital gain that exceeds the annual exemption of R40 000.
* Nkomo is the chief executive officer of Inkunzi Wealth Group