READER QUESTION OF THE WEEK
YOUR MONEY: What kind of tax do I pay on a five-year bond investment?
This week a reader wants to know what her tax liability is if she sets aside R1m for her child’s education in an RSA retail savings bond
I’m considering putting R1m into a five-year RSA retail savings bond for my daughter’s school education as the yield is now 11.25%, with the option of reinvesting the interest over the period of the bond.
According to the RSA calculator, I should end up with a sum of R1,729,694 at the end of the term.
My question regards tax implications. If that interest is reinvested over the duration of the bond, would I then only pay capital gains tax (CGT) on the final amount, or would I still be charged some form of income tax, even though I’ve not drawn that interest as income?
— Name withheld
Unfortunately, even though the term is five years and the interest received each time is being reinvested, it won’t be taxed as CGT.
The interest received every year will be added to your income and taxed accordingly. However, remember there is an annual interest exemption of R23,800 if you’re under 65 and R34,500 for those over 65, so there is some relief.
In your example, in year one you’d earn R112,500 in interest, so you would deduct the exemption above as per your age and the balance would be added to your income and taxed at your rate.
Importantly you haven’t received the interest as you reinvested it, but you’re still liable for the tax.
An option to consider if you’re married is to donate half the money upfront to your partner; this is exempt from tax due to your being married.
You then each deposit R500,000 into the RSA retail bonds and earn half the interest (R56,250 in the first year), but you also then each get the interest exemption.
— Your money team
We want to hear from you! Send questions to firstname.lastname@example.org
I read your article Your Money (November 9-15) entitled “Living or life annuity — which to pick?”
I request you to urgently add to this article what, if any, are the implications cost-wise of taking out more than one — you even refer to three annuities. Is this not just feeding the suppliers and brokers of these products?
Your response would be appreciated as I am in a similar situation.
— M van der Griendt
The cost of a living annuity will be a percentage based on the amount invested. So splitting between a number of living annuities won’t change the overall fee. However, some providers may discount the percentage fee for larger amounts invested so the reader is correct to manage multiple living annuities with this in mind.
Further, costs overall are a huge consideration and must be part of the decision of where to invest. If, for example, your drawdown is 5% a year but the fee is 2%, you’re essentially drawing down an extra 40% per year just in fees. So always look for lower fees and remember there are layers of fees, such as platform, product and adviser.
Your Money team
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