If you are in the fortunate position of realising a sizeable surplus cash flow, i.e. monies available after meeting all your financial obligations and living expenses, you may want to consider adding to your monthly payments on your mortgage bond. The benefits are obvious, you’re saving at a tax-free rate of return, equal to the interest rate charged on the mortgage bond. Moreover, if you increase your mortgage payments, you’ll pay off your bond faster than with the normal payment schedule.
For example, when the outstanding bond is R1,000,000 and the repayment term is 240 months, the normal payment at prime rate of 10.25% will be R9,816 per month. By adding R1,000 per month to the payment, the repayment term will be shortened to 184 months, thereby saving more than four-and-half years on the repayment schedule.
Alternatively, say, you will qualify to make additional tax-deductible contributions towards your retirement plan. Is that perhaps a better alternative than repaying off your mortgage bond quicker?
Source: RA vs Mortgage
By Bob French
Source: What is risk?
Is it better to save for retirement through approved retirement fund structures, like a Retirement Annuity (RA) or simply doing your own thing (investing without any limitations)?
With an RA the tax benefits are immediate, contributions are tax-deductible, but eventually when one starts drawing down from the retirement fund at retirement the proceeds are taxable. Another huge tax benefit is that all growth within retirement fund structures are exempt from income tax, dividend tax, capital gains tax and eventually estate duties. The downside to an RA? Specific investment regulations apply (Regulation 28 that prescribe maximum limits to allocation to offshore currencies and markets, equities, and property investments). Another limitation from making use of RA’s could be that access to retirement funds is limited, during the accumulation phase (not accessible until reaching age 55) and during retirement.
Outside the approved retirement fund structure, investing is subject to normal taxation on interest, dividends, capital gains and estate duties. Moreover, contributions are not tax-deductible. However, a discretionary investor is free to invest the way she sees fit, whether no offshore or all offshore, no cash or all cash, no equities, or all equities, etc. Capital is always accessible – capital gains may apply, but note, if the overall objective was to save for retirement, access to capital prior to retirement is not necessarily an advantage. Once capital drawdowns are made from the accumulated assets, capital gains tax may apply, but otherwise it will be deemed as capital withdrawals and not subject to taxation.
By Wade Pfau
Source: Success Rates
By Wade Pfau