Tax-free savings accounts to boost savings culture in SA
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.”
Head of Investec Cash Investments