TAX-FREE SAVINGS ACCOUNT
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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.
REDUCING YOUR TAX LIABILITY
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.
Savetaxfree.co.za’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
WHAT IS A TAX-FREE SAVINGS ACCOUNT?