Treasury’s new savings concessions come with responsibilities, writes Phakamisa Ndzamela
Important to understand the risks and what you are charged for
To benefit optimally from the tax-free savings accounts that have come into the South African financial markets, savers have a duty to assess which institutions pay the best returns on the capital they invest, and they need to look carefully at how the fees compare. It is also necessary to understand the potential risks involved in the tax-free savings account the service providers offer.
From March 1 this year individuals have been allowed to save a maximum of R30 000 annually and R500 000 over their lifetime without being taxed. The time limit for the annual amount covers the period March 1 to the end of February the following year.
The new regulation forms part of government’s plan to encourage saving by offering tax-free incentives. The Treasury has said the returns, which may come in the form of interest, dividends and capital growth, will not attract income, dividends or capital gains tax. It will take someone about 16½ years to reach the lifetime limit of R500 000 if he or she saves the maximum R30 000/year.
The various financial institutions have different requirements regarding the minimum amounts to be deposited in these accounts.
Over time savings can exceed the R500 000 lifetime limit due to earnings they attract, such as interest and capital gained. This will not be penalised.
Financial firms have responded with an array of products, and savers will have to choose which institution has the offering that best suits their needs. Firms that have put such savings products on the market include banks, insurers, wealth managers, stockbrokers, linked investment service providers and government (through its retail savings bond product). People can even get exposure to equity markets. However, it is important to understand the risks and what you are charged for.
Owen Nkomo, founder of Inkunzi Investments, notes that most funds are exposed to money market or fixed income solutions, which often have low returns. Money market funds have their own risk. This was demonstrated when African Bank Investments failed last year, leaving many savers with money market accounts with reduced savings.
“The ones with equity exposure present clients with huge market risk as they are mostly based on exchange traded funds (ETFs). This eliminates the alpha-generation capacity [additional returns above the market] of some quality fund managers, and increases the risk profile if the ETFs used are not optimised well.
“But this is mitigated by the fact that most people who invest in ETFs understand that they have opted for low-cost market-matching returns and [know] the risk,” says Nkomo.
“Most active managers cannot provide solutions, as they charge performance fees, and by virtue of their standard management fees being high, they do not meet the national Treasury framework for lowering investment costs, especially if adviser fees are factored in.”
If people save less than R30 000/year, they cannot save more than R30 000 the following year to make up for the previous year’s shortfall.
The Treasury points out in its guidelines that the annual limit is aimed at addressing procrastination by savers who delay putting money aside.
“If an individual misses the [annual] deadline, they lose out on tax-free returns on that amount for as long as that amount would have been in the account. The annual limit plays the part of encouraging saving in the short term, for future benefit. If people were allowed to roll over any unused amount, there would no longer be a specific end point for their savings, and they would most likely put off saving the money ‘until later’.”
Savers can have multiple tax-free savings accounts as long as they do not exceed the savings limit in total. People have a duty to monitor their savings threshold and those who breach this will be penalised. The Treasury has said that contributions over the R30 000 annual limit or lifetime limit of R500 000 will incur a 40% tax penalty. To encourage competition, it has allowed for savers to transfer their savings to the service provider deemed best suited to their needs. But people will have to understand the terms and conditions that come with withdrawing and transferring the capital to another financial services company.
Some services providers will charge an exit penalty.
To avoid unnecessary risks, people will have to be vigilant to avoid pyramid schemes, and must ensure that the institutions they are saving with are registered financial service providers.