First published in the Daily Maverick 168 weekly newspaper.
Answer: A wrapper is a structure through which you make a financial investment. If you invest in the same basic investment through different structures, you will get quite different outcomes. If you choose your wrapper cleverly you can get a lot of additional benefits from your investment.
Take a basic unit trust investment.
These are extremely popular as they provide an easy and convenient way to invest in the stock market. I come across many people who have all their investments in unit trusts and ETFs and have built up substantial portfolios. The sad part is they have left money on the table or exposed themselves to unnecessary tax and cost leakages as their investments are not in the optimum structures. Had they invested through an appropriate wrapper, there would have been a lot of additional benefits to improve their overall financial wellness.
I will illustrate the benefits of the different wrappers below:
Many people invest their money directly in a unit trust. They can, however, also invest in this unit trust through any of the following products:
These products are the wrappers through which you can invest in the unit trust.
You are allowed to invest R36,000 a year in a tax-free savings investment, with an overall restriction of R500,000 over your lifetime. There is no tax payable on the investment growth or the proceeds from a tax-free investment. This investment may be accessed at any stage.
Had you invested your unit trusts through a tax-free structure, you would not pay any dividends tax, nor would you pay any capital gains tax on the proceeds.
If you intend investing for at least five years, then you should consider housing your unit trust in a life-wrapped investment wrapper. There are several benefits that you will receive:
The investment growth is taxed at a preferential 30% tax rate, so if your tax rate is over 30% you are making an immediate tax saving. Capital Gains Tax will be 12% instead of a possible 18%;
There is no further tax when the investment matures; and
If you attach a beneficiary to the endowment, you will not have to pay executor fees of R40,250 for each R1-million.
You must, however, make sure you choose a new-generation policy with transparent fees. Some of the old versions of this product have high upfront fees and expensive structures, which defeats the purpose of the exercise.
If you want to save for your retirement, then use a retirement annuity wrapper. Your premiums will be deducted from your income for tax purposes. This means that the receiver of revenue will be contributing to your savings at your marginal tax rate.
The growth in the retirement annuity will be tax-free.
The downside of a retirement annuity is that you cannot access the money before you turn 55. If that was your intention when you invested in the unit trust, then it would make sense to get the upfront tax break.
A big advantage of using a retirement annuity is that it does not form part of your estate. This will save you 20% to 25% in estate duties when you die. If there is a beneficiary, there will be no 4.025% executor fees payable.
As you can see, it makes a lot of sense to understand why you are making a particular investment. If it is for the shorter term, then use unit trusts. If you are investing for the longer term, then choose the appropriate vehicle. Remember, you are investing in the same portfolio – it is just the wrapper that is changing. The benefits of using a wrapper can be substantial. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.
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