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Presenting the Allan Gray Tax-Free Balanced Fund

We are excited to announce the launch of the Allan Gray Tax-Free Balanced Fund. This new unit trust will be managed in broadly the same way as our flagship Balanced Fund but will have a different fee structure, and will allow you to take advantage of the tax-free legislation that came into effect on 1 March 2015. Richard Carter and Earl Van Zyl explain our offering in more detail.

The government introduced a new type of regulated investment account in March last year called a tax-free investment (a ‘TFI’), with limits currently set at R30 000 per year and R500 000 over your lifetime. This is not the only regulated savings product that offers tax benefits (see Table 1), and we recognise that having another kind of vehicle and a unit trust with a different fee structure makes things more complicated for clients. However, with no tax on gains or income, and no restrictions on withdrawals, and fewer investment restrictions than retirement funds, even if you have more to invest over a year it probably makes sense to use a tax-free product for the first R30 000, if you are investing for the long term.

The Allan Gray Tax-Free Balanced Fund will be added to our range of unit trusts in February and you can access it through our new Allan Gray Tax-Free Investment Account.

Why a different fee structure?

In line with their general aim for simplicity, regulations require that all tax-free investment options charge fixed investment management fees. As long-time Allan Gray clients will know, we remain strong proponents of the benefits of performance fees, which mean clients pay lower fees when a unit trust underperforms and higher fees for outperformance. We think well-designed performance fees give clients better value for money. Yet, while we disagree with the outright ban on performance fees in TFI products, and have argued (and continue to do so) that clients should be allowed to make a choice for themselves on fees, we are also keen that our clients benefit from the new legislation. We are thus offering a TFI-qualifying Allan Gray unit trust that complies with the fee constraint.

Our Tax-Free Balanced Fund will have the same mandate and objectives as the existing Allan Gray Balanced Fund, and except for the different fee structure, we expect that over time it will offer clients a very similar return outcome. The  investment management fee will be fixed on both the portions managed by Allan Gray and Orbis and will average out at a TER of approximately 1.57% including all investment management fees, trading costs, administration fees and VAT.

What are the potential tax savings?

In a basic unit trust investment (i.e. without a tax-free investment account), different types of tax may apply, depending on the underlying investments:

Dividend withholding tax, at 15% of the gross dividend, is usually deducted directly from the dividend amount and decreases the dividend return that the investor receives. No dividend withholding tax is deducted in a tax-free investment account.

In a basic unit trust investment, when you complete your tax return you are liable for tax on your interest income and capital gains (if they are above the tax thresholds of R23 800 and R30 000 respectively), calculated according to your marginal income tax rate. In a tax-free investment, each of these taxes is reduced to zero.

Graph 1 shows the potential value of an investment in the Allan Gray Balanced Fund through a regular unit trust account compared to a TFI account. We have illustrated the maximum tax benefit by assuming that every rand of growth in the regular unit trust falls above the current tax exclusion allowances for interest and capital gains. For this illustration we assumed 13.3% total return with the split between capital gains, interest and dividends based on our Balanced Fund’s track record since inception, and that the investor contributes the maximum R2 500 per month for 15 years. In the first few years the benefit is small. But as long as the unit trust delivers a meaningful positive return, the TFI account will generate meaningful value compared to a regular unit trust investment over the very long term. The potential difference after 15 years could be as much as an extra 30% in value, driven by the value of compounding all gains tax free.

Are TFI products suitable for everyone?

There has been considerable debate among market commentators about the benefits or otherwise of TFI accounts versus retirement products such as retirement annuities (RAs) and other products, like endowments and unit trusts. These products meet different needs, with different costs and benefits associated with each. There is one important ‘catch’ with TFI: SARS will levy a 40% penalty on the value of contributions over and above the limits, which are for all tax-free savings and investment accounts you may have across different product providers. It will be your responsibility to make sure that you don’t breach these limits if you are invested with more than one provider.

As withdrawals are allowed, but cannot be ‘replaced’ given the way the contribution limits have been designed, investors would benefit most from using their TFI allowance as part of their long-term savings plan, rather than for shorter-term goals like saving for an end-of-year holiday or for an ‘emergency fund’.

Table 1 highlights some characteristics to consider when evaluating TFI accounts against other product options. Choosing an appropriate product can be complex. A good, independent financial adviser can play an important role in helping you to make informed product choices.

Key features of the Allan Gray Tax-Free Investment Account

Allan Gray Life underwrites the product as a life policy to provide investors with all of the estate planning benefits but without the liquidity restrictions normally associated with a policy: you can access your investment at any time at no cost. Although it is underwritten by Allan Gray Life, when you invest in the Allan Gray Tax-Free Investment Account your investment returns come from the specific unit trusts you choose in the account. As discussed above, current legislation limits your investment options to unit trusts that charge fixed fees. The Allan Gray Tax-Free Balanced Fund is available as one of the underlying unit trust options in our TFI product, alongside our Money Market Fund and any of the fixed fee third party unit trusts available via our investment platform. Investors can consult our latest Allan Gray Tax-Free Investment Unit Trust List, available via our website or from our Client Service Centre, for a full list of available unit trusts. Consistent with all of our other products, the administration fees that we charge will be based on the same tiered pricing structure of our other platform products and will be determined based on the total value of all of your unit trust-based investments with us. There are no additional transaction fees and no penalties for withdrawing any portion of the investment value. You can manage your account at your convenience entirely online.

Value of investing tax free

The deadline to invest in the 2015/2016 tax year is 14:00 on Friday, 26 February 2016. If you would like to invest in an Allan Gray Tax-Free Investment before the end of the tax year, please ensure that we receive your instructions and supporting documents before the deadline. Please note that EFTs will not be allowed – to ensure that you do not exceed the contribution limits in your Allan Gray Tax-Free Investment, we will collect the money from your bank account via a direct debit.  

  Tax-free investment
Retirement annuity
 Endowment Unit trust
Are Investments tax deductible?   No

Yes, up to certain maximums. 

No  No 
Are there annual investment limits? R30 000 (may be adjusted over time).  No No, but with conditions No 
Are there lifetime investment limits? 

R500 000 (may be adjusted over time).

 No No No
What happens if I invest more than the limits? You will have to pay a penalty of 40% of the amount you invest above the maximum, across all your accounts. Not applicable  Your five-year restriction period will be extended if you invest more over one year than 120% of your investments over either of the past two years, into the same account. Not applicable
How much tax will I pay?  Tax free

Investment return is tax free.

Any money you take out at retirement may be taxed according to the retirement tax tables and your income in retirement will be taxed at your marginal rate at the time.

Taxed at 30%. Taxed at your marginal rate (for income and capital gains exceeding current tax-free thresholds).
Can I access my money?  Yes No withdrawals prior to retirement (except under specific circumstances) and limited access at retirement.  Yes, but with restrictions. Yes
Are there any investment restrictions?

May not invest in direct shares or derivatives.

Must comply with the retirement fund investment limits. None None
Does the product offer estate planning benefits? You may nominate beneficiaries when the TFI is a life policy. If you do, although estate duty is payable, there are no executor’s fees.  You may nominate beneficiaries, although the trustees determine the allocation between your dependants and nominees. Not part of your estate. You may nominate beneficiaries. If you do, although estate duty is payable, there are no executor’s fees. Forms part of your estate.

Learn more about our Tax-Free Investment Account.

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