A to Z of SA’s new tax-free investments – “no brainer” for all of us

The new tax-free investments introduced at the beginning of this month are a “no brainer”. As Nedgroup Investments’ Anil Jugmohan explains in this special podcast, there are obvious reasons why they should be the home of the first R30 000 a year of every South African’s savings. Not quite so obvious, though, is the vehicle. Although the out-performance of equities suggests an index tracker is the best choice, Anil argues why a property or even money market fund might be a better option. – Alec Hogg

I’m in Cape Town, in the Nedgroup Investment offices with Anil Jugmohan who’s an Executive with Nedgroup Investments. No doubt, you’ve been doing quite a lot of thinking about ‘after the Budget’. We knew that the tax reinvestments were coming in, on the 1st of March. They now are with us and they were confirmed in the Budget. What kind of difference is this going to make to investors in South Africa?

Thanks, Alec. We’re very excited about this product. We think that National Treasury has given the investing public a huge freebie where this is concerned and in line with our culture of stewardship, we’ve invested significantly to make sure that we can bring this product to market and make sure that we have a fantastic value proposition for clients.

I don’t know if you watched the Budget speech but when Nhlanhla Nene (the Finance Minister) mentioned the introduction on the 1st of March, there was applause but not really much, so he stopped. He said ‘did you hear what I just said about the tax-free investment’ and then there was much stronger applause. Have clients clicked to it yet or are you going to have to do a lot of marketing to let them know?

We’re currently doing quite a lot of education to make sure that people understand its impact. Unfortunately, many people in South Africa simply don’t save enough. It seems as if people prioritise current spending over the future/long-term savings plans, which we think is rather a sad state of affairs. Certainly, we’re trying our best to make sure that as many as people as possible take advantage of the benefits of long-term compounding.

What are the hard facts here? How much can you put away?

It’s R30k per year, per individual and there’s a lifetime limit of R500k. We certainly think that over time, those amounts would be adjusted upwards, by inflation.

Are all the returns on the R30k per year, tax-free?

Absolutely. There’s no dividends tax, no income tax, and no capital gains tax so we think it’s really, a fantastic opportunity for people. Whether you are currently saving or whether you haven’t saved a penny yet, we certainly think it’s a great opportunity to get going now.

Could you put that money into equities, unit trusts, or individual shares?

We pretty much offer our entire unit trust range within this vehicle and certainly, some other product providers are offering shares. They’re offering bank fixed-deposits. However, we believe that a unit trust vehicle is very flexible and very cost-effective, and that’s where we’re transparent. Obviously, there’s an external custodian involved as well, so it makes it very safe for people to come and invest their money for long periods of time.

Contrarian investors might be saying that your Managed Fund has had a bad run for a long time, but it’s going to improve in future. How would they go about (1) taking advantage of the contrarian view on the one hand by putting it into the Managed Fund, and (2 ) of the tax-free opportunity?

For example, High Equity Funds are not, the most tax-efficient vehicle. You don’t get the most amount of benefit by investing in a High Equity Fund through the tax-free savings account but certainly, something like property, Money Market, or even Low Equity would make a much more tax-efficient investment. You’d definitely get more benefit out of that.

How does that work? You’d think that Equities, over time, would generate more return.

We’ve done quite a lot of research in terms of the tax rates that you pay and the various components of returns. For example, dividends tax is 15 percent. Capital gains tax was previously 33 percent. It’s currently closer to 35 percent. Income tax depends on your marginal tax rate. What we’ve done is simulate. If you had to look at long-term average returns – looking at inflation and the costs investors would pay for various products – we each had to simulate that over a 20-year time horizon. It actually turns out that even though the capital gains effect from equity is the highest, you don’t actually get the most amount of tax savings from equities. It’s an interesting result and certainly, something that we think clients would like to know.

It sounds as though property might be the better option.

Spot on. Property and Money Market seem to be the biggest beneficiaries of this tax-free savings account.

Do you have a particular fund, into which you’ll be putting your money?

As with myself and many other people, we have different time horizons and different savings goals. Certainly, what people should be doing is chatting to a financial planner who has a huge amount of experience in this type of thing, to best advise you as pertains to your circumstances, how you should be investing.

It’s therefore not obvious in the way that you might think. What about when you want to withdraw? Is there a particular age, as with Retirement Annuities?

The products that we’re offering in terms of Unit Trusts are very flexible. It’s amazing. You can invest today, change your mind, have all your money back tomorrow, and there are no penalties involved for that. We think it’s a very flexible vehicle but of course, the longer you invest, the more benefit of compounding of returns that you’re able to achieve. I would be an advocate for longer periods of time.

Then it becomes a direct competitor to the Unit Trust industry because surely, you can put your money away (okay, only R30k of it per year) but if you can put your money away, guaranteed that the returns are going to be tax-free; that’s a big advantage, particularly if you can draw it out any time you want.

Absolutely. We certainly do expect some product cannibalisation but we’d rather have clients investing in the most tax-efficient and cost-effective way, so we’re willing to take the hit from a profitability perspective.

If you had R100k in a particular Unit Trust, it might make sense now to divert R30k of that p.a. into one of these tax-free accounts.

Absolutely. Once again, you should chat to a professional financial advisor to make sure that you understand the tax consequences because unfortunately, you can’t directly transfer an existing Unit Trust.

You pay tax on cashing in, I guess.

Exactly. You have to actually withdraw the money into cash and then, using cash, invest into the tax-free vehicle. I’m sure people would be doing that. It’s a rational thing to do.

At least, the new money that you’re putting in now… Instead of putting it into your Index Tracking Fund in future, just put it into the tax-free Index Tracking Fund. Does that makes sense?

Absolutely. You bring up a very good point because we’re going to offering our passive multi-asset range of solutions at a very cost-effective fee – 35 basis points + VAT. If you look into the market, you’d struggle to find a better value proposition that that.

Explain that – 35 basis points. It’s point-three-five percent. How do you manage to charge so little?

Look, it’s a partnership between ourselves, and the underlying manager. Once again, it speaks to our culture of stewardship. Many people prefer passive investments. They’re not willing to take ‘active manager’ risk and obviously, with active managers, you can underperform your benchmark or you can outperform. At the recent Raging Bull Awards, we placed third, which is the 6th year in a row that we’ve placed in the top 3, which is testament to the strong performance of our range overall. Certainly, for people who are cost-conscious or prefer to passively manage investments, it’s a great value proposition.

That’s interesting because it wasn’t long ago that Sygnia came to the market, saying that they are slashing costs. They were at 40 basis points, so you’re even undercutting them.

We’ve had this fee structure in place for quite a while now and it certainly wasn’t our intention to undercut them. Of course, we want to offer the best products to our clients, as far as possible.

It’s quite clear to me. If I had R30k to invest (and I like the idea of Index Trackers because I think they outperform 70 percent of Fund Managers), I’ll find an Index Tracking Fund, 35 basis points with Nedgroup Investments and all my return are tax-free.

Spot on. I think there’s no better way of saying it.

Anil Jugmohan is with Nedgroup Investments.

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