Tax-free sav­ings ac­counts to boost sav­ings cul­ture in SA

Finweek English Edition - - MONEY -

South Africans will be able to in­vest up to R30 000 a year in tax-free sav­ings ac­counts from 1 March, al­low­ing in­vestors to earn in­ter­est, div­i­dends a nd cap­i­tal gains with­out tax im­pli­ca­tions.

The ta x-f ree sav­ings ac­counts (TFS) are an ini­tia­tive by Na­tional Trea­sury to en­cour­age house­hold sav­ings in a coun­try where only 42% of adults save, ac­cord­ing to the Fins­cope 2013 sur vey. The new ac­counts will cover prod­ucts in­clud­ing re­tail sav­ings bonds, col­lec­tive in­vest­ments, ex­change-traded funds (ETFs) and bank de­posits, but not di­rect share pur­chases or de­riv­a­tives.

“The house­hold sav­ings rate in South Africa is ex­tremely low,” says René Grob­ler, head of In­vestec Cash In­vest­ments. Cur­rently, sav i ngs ac­count for only 15%, which is low ac­cord­ing to in­ter­na­tional stan­dards, she says.

TFS will re­place t he ex­ist­ing in­ter­est tax ex­emp­tion of R23 800 a year for tax­pay­ers un­der the age of 65 (R34 500 for re­tirees). Th­ese ex­emp­tions will no longer be ad­justed in line with inf la­tion.

How TFS works

In­di­vid­u­als can in­vest in mul­ti­ple prod­ucts, pro­vided in­vest­ment con­tri­bu­tions do not ex­ceed the an­nual limit of R30 000. The life­time limit for ta x-free in­vest­ments is R500 000 and will take 16 years and eight months to reach. Af­ter ap­prox­i­mately 17 years, an in­vest­ment of R30 000 a year (as­sum­ing a 7% re­turn) could be worth over R1m, ex­plains Grob­ler.

Con­tri­bu­tions ex­ceed­ing R30 000 a year will in­cur a tax penalty of 40%. In the first year, trans­fers be­tween prod­uct providers are not al­lowed but trans­fers be­tween prod­ucts from the same ser­vice provider into the new ac­count are per­mit­ted, says Grob­ler. Prod­uct providers in­clude banks, long-term in­sur­ers, unit trusts and the gov­ern­ment (through bonds).

As TFS work as in­vest­ment ac­counts only, debit or­ders and the is­su­ing of guar­an­tees will not be per­mit­ted. Funds will be ac­ces­si­ble within seven days in emer­gency cases.

The max­i­mum al­lowed for exit penal­ties c harged by prov i ders (for pre­ma­ture with­drawals) set by Trea­sury is R300. The ac­ces­si­bil­ity of funds makes TFS ac­counts more at­trac­tive than re­tire­ment an­nu­ities (RA). RA funds are only ac­ces­si­ble at re­tire­ment, con­tri­bu­tions are taxfree but re­turns are ta xed. As for TFS, af­ter-tax money is in­vested and re­turns are tax-free.

Grob­ler ad­vises peo­ple to con­sider the first-mover ad­van­tage. At a rate of 7%, wait­ing a year to in­vest t rans­lates into a loss of R150 000 t hat could have been earned over 17 years, she says.

It is still to be determined if TFS will help to build a sav­ings cul­ture i n SA. Con­sid­er­ing sim­i­lar TFS prod­ucts adopted in the UK, the ini­tia­tive didn’t in­cen­tivise new sav­ings; it only moved money around the mar­ket. “It’s hard to say what im­pact it will have in South Africa,” says Grob­ler.

In­cen­tivis­ing house­hold sav­ing benef it s eco­nomic g r owth. By in­creas­ing f i xed in­vest­ment, there is less re­liance on for­eign cap­i­tal and gov­ern­ment debt, says Grob­ler. “It’s a vir­tu­ous cir­cle. Sav­ings cre­ate in­vest­ment, in­vest­ment cre­ates growth and growth cre­ates in­come.”

René Grob­ler

Head of In­vestec Cash In­vest­ments

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