Se­cure your fi­nan­cial fu­ture with a

CityPress - - Business -

With just days to go be­fore the first tax-free in­vest­ment year ends on Fe­bru­ary 29, South Africans have been urged to make full use of the tax-free sav­ings and in­vest­ment op­por­tu­ni­ties avail­able to them – par­tic­u­larly in light of in­creased fi­nan­cial pres­sure that looks set to con­tinue this year

Tax-free sav­ings ac­counts (TFSAs) and tax-free in­vest­ments (TFIs) were in­tro­duced by govern­ment last year to en­cour­age a cul­ture of sav­ing among South African con­sumers, who are in the habit of spend­ing their in­come in­stead of set­ting aside fixed amounts to save each month. Ad­di­tion­ally, in­creas­ing the over­all level of sav­ings in the econ­omy would bring wider macroe­co­nomic ben­e­fits to the coun­try as a whole.

A re­cent World Eco­nomic Fo­rum re­port ranked South Africa 72nd in the world for its gross na­tional sav­ings rate – and 13th in Africa. It was also high­lighted that South Africa was the third worst of all coun­tries sur­veyed when it came to speak­ing to chil­dren about money.

All pro­ceeds, in­clud­ing in­ter­est in­come, cap­i­tal gains and div­i­dends from TFSAs and TFIs will not be taxed. In­di­vid­u­als have the op­por­tu­nity to in­vest up to R30 000 a year in a tax-free ve­hi­cle, and a max­i­mum of R500 000 over their life­time. If this re­quire­ment is not ad­hered to, penal­ties will come into ef­fect. The SA Rev­enue Ser­vice (Sars) will levy a tax of 40% on all con­tri­bu­tions that ex­ceed the R30 000 thresh­old per tax year.

In­di­vid­u­als are al­lowed to open two such ac­counts a year, which can be in­vested in eq­ui­ties, fixed-in­come ac­counts or both, but it is im­por­tant to note that the max­i­mum lim­its will ap­ply across all of their tax-sav­ing prod­ucts.

Fi­nan­cial in­sti­tu­tions must al­low in­di­vid­u­als to ac­cess their funds within seven busi­ness days af­ter they re­quest it. Once an early with­drawal is made, that amount may not be re­placed. In other words, if you have in­vested R30 000 in a year but draw R5 000, you may not rein­vest R5 000 later in the same year for the tax-free ben­e­fit.

Jean Min­naar, gen­eral man­ager of sav­ings and in­vest­ments at Old Mu­tual, be­lieves that TFSAs are an “ideal ve­hi­cle” for top­ping up your dis­cre­tionary re­tire­ment sav­ings.

“You are free to with­draw your money at any time, for what­ever rea­son, with no re­stric­tions or penal­ties,” he says.

Den­ver Keswell, se­nior le­gal ad­viser at Ned­group In­vest­ments, says: “This means that once you have put your money in, you will not pay any tax, and any­thing you make through your in­vest­ment, you get out. This is in essence free money.”

And be­cause you don’t pay tax on the in­vest­ment re­turn, your money can grow faster in a TFSA com­pared with a reg­u­lar sav­ings ac­count, Keswell says.

Ger­ald Mwan­di­ambira, a strate­gist at the SA Sav­ings In­sti­tute, says: “Tax-free sav­ings will sig­nif­i­cantly in­crease the re­turns for in­di­vid­u­als.”

In keep­ing with the key aim of pro­mot­ing new sav­ings – in a highly debt-rid­den so­ci­ety – per­for­mance fees are not al­lowed on TFSAs. How­ever, ad­min­is­tra­tion fees still ap­ply, so it is im­por­tant to care­fully com­pare the of­fer­ings from dif­fer­ent fi­nan­cial in­sti­tu­tions. Banks add charges that re­duce your sav­ings, so shop around for the best pos­si­ble op­tion.


Keswell says that mak­ing smart use of the tax-sav­ing in­cen­tives can have sig­nif­i­cant and pos­i­tive long-term fi­nan­cial ef­fects.

This ap­plies to those al­ready in­vested in tax-free prod­ucts, as well as any­one who has not yet con­sid­ered tax-free in­vest­ments, or even first-time in­vestors.

Min­naar em­pha­sises that the funds should ideally be al­lowed time to ma­ture and de­liver re­turns. It is over the longer term that the real ef­fect of com­pound in­ter­est will be re­alised ( see info box).

He says TFSAs are a very ef­fi­cient way of build­ing dis­cre­tionary wealth – be it for a spe­cific goal, education funds or even sup­ple­ment­ing re­tire­ment cap­i­tal. It all de­pends on your needs and ob­jec­tives.

The kind of re­turns in­vestors can ex­pect from their con­tri­bu­tions de­pends very much on what kind of in­vest­ments they make.

Low-risk, low-yield in­vest­ments such as fixed de­posits from a bank earn about 6% a year, while high-risk prod­ucts such as ex­change-traded funds, which are in­vested on the JSE, could earn af­ter-cost re­turns of a stag­ger­ing 18%.

As­sum­ing that re­mains the case, if you in­vest R30 000 at the be­gin­ning of each tax year for the next 17 years, your ac­count would be worth R2 600 000 when you reach your R500 000 life­time limit.

For short-term goals, cash de­posits or an in­vest­ment in retail sav­ings bonds are prob­a­bly the best op­tions be­cause of their liq­uid­ity and low level of risk.

While the re­turns may be lower than those of other in­vest­ment types, the risk of los­ing money is low and re­turns are al­most guar­an­teed. And be­cause the re­turns are low, us­ing a TFSA is likely to be un­nec­es­sary be­cause ex­ist­ing tax al­lowances will be enough to cover any re­turns.

How­ever, with a longer-term sav­ings goal, such as sav­ing for your child’s fu­ture, equity and prop­erty could be bet­ter in­vest­ment ve­hi­cles. Equity in­vest­ments can be ac­cessed in a TFSA via unit trusts or ex­change­traded funds.

While an in­vest­ment in unit trusts can range from low to high risk, de­pend­ing on its man­date, it can yield sig­nif­i­cant re­turns, de­pend­ing on the level of risk and the du­ra­tion of the in­vest­ment.

TFSAs make ex­cel­lent sav­ings ve­hi­cles for education, and par­ents have been ad­vised to open an ac­count in the name of a child as soon as pos­si­ble af­ter birth. A fam­ily of four can ef­fec­tively save up to R120 000 a year in taxfree sav­ings.

Der­ick Fer­reira, se­nior prod­uct man­ager at Old Mu­tual, says in­vestors with lower tax rates who are not re­quired to sub­mit tax re­turns may not ben­e­fit from the tax de­ductibil­ity of re­tire­ment an­nu­ity con­tri­bu­tions, and should there­fore con­sider a TFSA.

In­vestors also need to weigh up flex­i­bil­ity and liq­uid­ity over tax ben­e­fits. If in­vestors are not con­tribut­ing to a re­tire­ment an­nu­ity due to the in­abil­ity to ac­cess such funds be­fore re­tire­ment, then they should at least be con­sid­er­ing a TFSA, he says.


It’s around this time ev­ery year that peo­ple who are look­ing to re­duce their tax li­a­bil­ity to Sars, as well as save to­wards their re­tire­ment, start do­ing cal­cu­la­tions and con­sult with their fi­nan­cial plan­ners.

“While one’s im­me­di­ate fi­nan­cial po­si­tion is al­ways top of mind, we urge in­vestors to se­ri­ously con­sider the longer-term ben­e­fits of max­imis­ing their al­lo­ca­tions to tax-free in­vest­ments in each tax year,” says Keswell.

“Con­tri­bu­tions to­wards re­tire­ment an­nu­ities and pen­sion funds can be very ef­fec­tively used, up to a cer­tain limit, to re­duce a per­sonal tax li­a­bil­ity to Sars. Fur­ther­more, pro­posed tax changes and the in­tro­duc­tion of tax-free in­vest­ments pro­vide even more in­cen­tives to ‘top up’ con­tri­bu­tions to­wards re­tire­ment funds and taxfree in­vest­ments,” he says.

Keswell ex­plains that in­di­vid­u­als have an ad­di­tional chance to re­duce their tax li­a­bil­i­ties by max­imis­ing their RA con­tri­bu­tions to en­sure that they use the full tax con­tri­bu­tion de­duc­tion they are en­ti­tled to.

Ac­cord­ing to Keswell, in­vestors are cur­rently en­ti­tled to deduct up to 15% of their net non-re­tire­ment funded in­come from their tax­able in­come (27.5% of re­mu­ner­a­tion or tax­able in­come, de­pend­ing on which is greater).

“In essence, it means that a busi­nessper­son who earns R1 mil­lion a year and is not a mem­ber of a pen­sion or prov­i­dent fund can re­duce their tax­able in­come by up to R150 000.

“As­sum­ing a tax rate of 41%, that is a tax re­bate of R61 500 at the end of the tax year. This R61 500 that would oth­er­wise be sit­ting with Sars can now be used to pay for monthly car pay­ments, gro­ceries or any other ex­penses.

“It is for this rea­son that many RA mem­bers should con­sider ‘top­ping up’ their RA con­tri­bu­tions if they are in a po­si­tion to do so,” says Keswell.


Early in­dus­try re­port­ing of take-up of th­ese ac­counts is very en­cour­ag­ing. Ac­cord­ing to Keswell, tax-free in­vest­ments have en­joyed a pos­i­tive re­sponse from the mar­ket in the first year, al­though there is cer­tainly room for im­prove­ment, given the ben­e­fits they of­fer.

His sen­ti­ment is echoed by Min­naar, who adds that TFSAs ap­pear to have struck a chord with South Africans, who gen­er­ally strug­gle to save and stay free of debt.

Save­’s re­cent sur­vey – which ex­cluded banks – found nearly a third of the 35 384 TFSAs opened be­tween March 1 and June 30 last year are be­lieved to be first-time savers, with R284 mil­lion be­ing held in th­ese ac­counts. Ac­cord­ing to the sur­vey, 32% of ac­counts opened were be­lieved to be by first-time savers.

In­flows into tax-free in­vest­ments at Ned­group In­vest­ments at the end of De­cem­ber were about R57 mil­lion from about 2 610 in­vestors.

“Im­por­tantly, of those in­vestors, most [1 895] were new in­vestors. So it’s clear that the tax-free prod­ucts are at­trac­tive for first-time in­vestors and there­fore achiev­ing the ob­jec­tive of en­cour­ag­ing more South Africans to save,” says Keswell.

At Old Mu­tual, nearly a third of the com­pany’s TFSA sales were on­line, show­ing that a younger, more dig­i­tal­savvy au­di­ence was mak­ing use of this sav­ing op­tion.

An im­pres­sive 70% of sales are re­cur­ring pre­mium sales, which il­lus­trates a com­mit­ment to on­go­ing fi­nan­cial plan­ning and sav­ings over the long term. This, says Min­naar, is a sign that some progress is be­ing made in chang­ing the way we think about sav­ing.

“Al­though th­ese ac­counts will help savers who have a habit of sav­ing al­ready, they can­not, how­ever, change at­ti­tudes to­wards sav­ing,” says Mwan­di­ambira.

“It is im­por­tant to make a de­ci­sion to save for your­self, save for your chil­dren and save for the fu­ture.”

Der­ick Fer­reira, se­nior prod­uct man­ager at Old


Den­ver Keswell, se­nior le­gal ad­viser at Ned­group



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