Should I invest in a term account or in a SICAV for my child?


When comparing interest bearing investment options, it is important to understand how quoted interest is calculated. Does rate refer to simple interest, which is a rate calculated on the principal investment amount, or does it refer to compound interest, which is the effective interest rate earned when you only withdraw not the interest earned each month?

Fixed deposit investments often quote the simple rate of interest, which can be confusing when comparing performance to other investments that show compound growth, such as unit trust funds.

A simple interest rate of 10.5% on a principal amount of R36,000 would earn you R3,780 per year for five years. If you were to reinvest the interest, you would receive five times that amount plus the principal at the end of the five-year term. This equates to a payment after five years of R54,900. This converts to a compound annual interest rate of 8.81%, which represents the effective interest earned if you reinvest rather than withdraw the interest earned.

Another important factor to consider is whether you need flexibility. Do you need to access the funds within the five year time frame? Would you like to make additional contributions to the investment? In exceptional circumstances, a withdrawal from a Fixed Deposit will be permitted, but penalties will apply. In addition, term deposits do not allow additional contributions to be made within the set time limit.

From an income tax perspective, it’s also important to note that once you’ve exceeded your annual interest exemption, any interest earned will be taxed at your marginal tax rate. Persons under the age of 65 enjoy an annual tax exemption of R23,800, which means that all interest earned up to this amount in a given tax year is exempt from income tax . If, for example, your marginal tax rate is 30% and you no longer benefit from your tax exemption, you will have earned after-tax compound interest of 6.49%. This figure is significantly lower than the 10.5% considered at face value.

When considering the tax implications, you may also want to consider using a Tax-Free Savings Account if you don’t already have one.

This product allows a maximum annual contribution of R36,000, which is the amount you have available. In addition to offering tax-free returns, this product generally provides access to funds if your needs and goals change. You can also add to this investment within the maximum annual contribution limits allowed. With a considered minimum investment horizon of five years, one can consider structuring this investment in a way that can include growth assets, such as stocks, which can be volatile in the short term, but have a high probability of outperforming. significantly inflation over time and create wealth.

If it’s likely that you already have a tax-free savings account or plan to use this product specifically to achieve an alternative investment goal, you might consider using a unit trust investment that offers also flexibility as well as the possibility of structuring the underlying funds with an emphasis on growth, using growth assets. From a tax perspective, stocks are not interest-bearing investments where taxes are paid on the interest earned. Realized capital gains are taxed at a maximum effective rate of 18% after the investment term. Currently, an individual is also entitled to an exemption of R40,000 per tax year on capital gains realized in the tax year.

A 20% withholding tax on dividends also applies. Although this tax is payable by the beneficial owner, the liability of the beneficial owner in this respect is usually assumed by a withholding agent (e.g. the management company of the mutual fund) at the payment stage (hence the name).

I’ve briefly explained a few factors to consider and made several assumptions, but it’s always a good idea to speak with a financial advisor, who will walk you through the options, given your unique needs, situation and your risk tolerance. .


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