Give your child his or her retirement as a gift


By Ross Marriner

Tax-free savings accounts (TFSAs) have in existence for four years and while most people have heard of them, many have still not taken advantage of this attractive tax-saving opportunity.

Every individual is entitled to invest a maximum of R 33,000 per annum (R 2,750 per month) into a tax-free investment plan.  The main advantage of a TFSA is that all growth in this investment is completely free of interest, dividends and capital gains tax.  The drain that these taxes can potentially have on the ultimate value of an investment is substantial.  At the moment there is a lifetime cap of R 500,000, but many experts believe that government will increase this amount over time as has been the case in other countries.

Most savvy investors regard a TFSA as an important component of their personal portfolio of investments.   There are, however, other ways in which one can take advantage of the tax-saving benefits of a TFSA.   In a recent article published by Nedgroup Investments, a TFSA was presented in an unusual way, as a retirement gift.  In this article the writer suggested that, instead of giving a child an expensive 21st birthday present, a parent or grandparent could rather invest in a TFSA in the child’s name.  Individuals are entitled to make donations of up to R 100,000 per annum, so SARS would not regard this as a taxable donation and therefore the contributions would not attract 20% donations tax.

If the investor was able to contribute the maximum contribution of R 33,000 per annum into the TFSA, after 18 years an amount of approximately R 600,000 would have been invested (assuming that government lifts the current investment ceiling).  If this lump sum remained invested and without making any further contributions until the “child’s” retirement age of 65, it is estimated that the lump sum would grow to the staggering amount of over R 20 million in today’s money.   This would allow the retiree to withdraw a tax-free “pension” of just over R 130,000 per month in today’s money, from age 65 until the age of 100!  The writer has made various assumptions; firstly, that the maximum lifetime limit of contributions has been reached when the child turned 18 and secondly, that the funds are invested in growth assets (equities); and finally, that the returns of the portfolio of investments are in line with the way markets have performed historically.

Although it is appreciated that most of us do not have the financial means to provide for our loved ones in this way, what the Nedgroup article does illustrate is the incredible benefit of compounded returns.  It also highlights how important it is to invest a sizable portion of one’s investment in growth assets which earn returns well above the rate of inflation (and not being too conservative such as investing in interest-earning investments or distracted by short-term volatility) and how important it is to invest in the most tax-efficient way possible.

Rands and Sense is a monthly column, written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891

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