Question: I have R4-million to invest to provide an additional income to meet my monthly obligations. I am working and paying 36% in income tax. Where can I invest this money and draw an income, and not have too much of it going to SARS?

Answer: It is important that you always look at the after-tax returns that you will be getting on an investment. You often see very attractive returns advertised, but once the tax has been deducted, you could find that you may have done better if you’d invested elsewhere.

I will run through some options you can consider, along with their tax implications. 

Investments that pay interest, like bank deposits and retail bonds

Banks and retail bonds are currently offering excellent returns. The downside here is that the interest income will be taxed at your marginal rate once you have exhausted the interest exemption. The interest exemption is R23,800 if you are under 65. If you are over 65, the first R34,500 will not be taxed. 

These types of investments are attractive if your tax rate is low. However, in your situation, where you are paying 36% in tax, you may do better elsewhere.

Investments like unit trusts and ETFs

These are a lot more tax-efficient, as their growth is rolled up and you will only pay tax when you make a withdrawal.

The advantage here is that the tax you pay is capital gains tax (in effect 40% of your marginal rate). The first R40,000 capital gain you make a year will not attract capital gains tax.

This is certainly worth considering for those in a high income tax bracket. In your situation, where your marginal rate is 36%, your capital gains tax rate would be 14.4%.

Insider tip

If you are going to use a structure like this, it makes sense to have some of your money in a fund that is relatively stable so you are not that badly affected by any short-term movements in the stock market.

If you have a high marginal tax rate, you should use a portfolio that pays out dividends rather than interest, as the tax rate on dividends is lower than that on interest.

Voluntary annuity

Many life insurance companies will provide you with a guaranteed income for a period of five or 10 years. At the end of that period, you get your investment capital back.

What you must remember is that, although the rand value of your capital will be the same, its buying power would have been affected  by inflation over the five or 10 years during which the investment has run.

What is nice about this investment is that you’ve got certainty in terms of the income you get each month.

You need to get a quote so you can understand the tax implications, as the term of the annuity will affect the tax that you’re going to be paying.

As you can see, there are several options to consider. Once you have tested these, you should be able to draw up a shortlist of potential investments to work for you. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.