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The South African Revenue Service has paid out a record R321.1 billion in refunds to taxpayers. So, what should you do with the money you get back from the taxman? Should you spend or save it?
Carla Rossouw, tax lead at Allan Gray argues that some money should be set aside in the event you need it.
‘Treat your windfall like you would do the rest of your income by allocating portions of it to service your debt, grow your retirement savings pot, or invest your money to earn real returns – of course you could allocate a small portion for spending,’ advises Rossouw.
‘If you don’t currently have a financial plan, perhaps receiving a windfall could encourage you to put one in place. A good place to start is considering your budget, needs and goals, with the assistance of a good, independent financial adviser, if necessary.’
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Here she suggests four ways to invest the money.
1. Make sure it’s accessible
It’s important to have a portion of your money easily accessible in the event of an emergency. “An emergency fund will provide you with access to money and prevent you from abandoning your long-term financial plans when unexpected expenses or emergencies threaten to compromise your financial health,” says Rossouw
She adds that good ‘parking bays’ for emergency funds include low-risk investments, such as a money market funds, which can offer higher returns than a normal bank deposit and can be accessed in a short space of time if disaster strikes.
2. Remember your retirement
Have you got enough money saved for your retirement? If not, put some of your windfall in your retirement fund.
Rossouw points out that SARS offers a generous tax deduction of 27.5% of the greater of your taxable income or remuneration for the tax year, capped at R350 000 per annum, when you make contributions to your retirement annuity (RA), pension or provident fund.
She adds: ‘By adding to your retirement savings, you could reduce the amount of tax you pay next year.’
3. Think tax free
You could also consider putting this money in a tax-free investment (TFI) as you benefit from tax savings on investment returns. There are some disadvantages to this though.
‘There are restrictions and limitations that you have to be comfortable with. If you can live with these, are disciplined, and intend to remain invested for the long term, a TFI can supplement your retirement savings and give you a tax-free lump sum to enjoy,’ explains Rossouw.
4. Invest for the long and short term
An alternative to TFIs are unit trusts. The benefit here is that you could get higher returns than investing in a standard bank savings account or money market fund.
‘It remains true that if you are investing for the longer term and are looking for growth, then consider riskier assets, such as equities, as these have the potential to generate higher returns.
‘At the end of the day, remember that while investing may feel like a sacrifice it is just deferred spending – you put money away to grow so that it can meet your needs in the future,’ says Rossouw.
