YOUR GUIDE TO TAXFREE SAV­INGS

It has been three weeks since the launch of Na­tional Trea­sury’s tax-free sav­ings in­cen­tive. Fi­nan­cial ser­vice providers have re­sponded with prod­ucts for in­ter­ested mem­bers of the public look­ing to open ac­counts.

Finweek English Edition - - FRONT PAGE - BY LAMEEZ OMAR­JEE ed­i­to­rial@finweek.co.za

Con­sumers are spoilt for choice when it comes to tax-free sav­ings (TFS) prod­ucts, as a num­ber of fi­nan­cial in­sti­tu­tions have been launch­ing new of­fer­ings since the be­gin­ning of this month. Ac­cord­ing to Trea­sury’s TFS reg­u­la­tions, in­di­vid­u­als can in­vest up to R30 000 a year, capped at R500 000 over a life­time, in cer­tain tax-free prod­ucts. All re­turns – in­ter­est, cap­i­tal gains and div­i­dends – are tax free, and in­come earned that is rein­vested into ac­counts are not con­sid­ered con­tri­bu­tions.

Ru­pert Giess­ing, head of prod­uct devel­op­ment at PSG, says the TFS ac­counts serve as “great” sav­ings ve­hi­cles over the long term. The ben­e­fit of com­pound­ing will have a greater ef­fect on long-term growth of the in­vest­ments re­sult­ing in higher sav­ings.

“The sooner you start sav­ing the bet­ter,” he says. This makes TFS ac­counts ideal for sup­ple­ment­ing re­tire­ment sav­ings or sav­ing to­wards fu­ture goals like pro­vid­ing for your chil­dren’s ed­u­ca­tion.

The short- to long-term sav­ings na­ture of TFS makes it suit­able as a com­ple­men­tary in­stru­ment to ex­ist­ing taxfree in­cen­tives like re­tire­ment an­nu­ities (RAs) and in­ter­est ex­emp­tions, says Trea­sury.

The TFS is more f lex­i­ble in that it pro­vides in­cen­tives for more as­set classes as op­posed to the tax-free in­ter­est ex­emp­tion that only ap­plies to in­ter­est in­come and RAs which are spe­cific to re­tire­ment. Both the in­ter­est ex­emp­tions and RAs will run con­cur­rently with TFS. How­ever, the in­ter­est ex­emp­tions will not be ad­justed for inf la­tion as the TFS will re­place it as a non-re­tire­ment sav­ings in­cen­tive, says René Grob­ler, head of In­vestec Cash In­vest­ments.

Exit penalty fees charged can­not ex­ceed R300, and a tax penalty of 40% will be ap­plied on con­tri­bu­tions ex­ceed­ing the R30 000 limit. Should an in­vestor, for ex­am­ple, put R40 000 into a TFS in a year, the penalty of 40% will be ap­plied to the ex­cess R10 000, there­fore R4 000.

Prod­ucts on of­fer vary widely, and in­clude fixed de­posits, unit trusts, gov­ern­ment tax-free sav­ings bonds, cer­tain en­dow­ment poli­cies and ETFs.

Funds of TFS are eas­ily ac­ces­si­ble for with­drawal. How­ever, cap­i­tal can’t be re­placed im­me­di­ately and is sub­ject to the an­nual con­tri­bu­tion limit, says Seugnet van der Merwe, in­vest­ment an­a­lyst at Ned­group In­vest­ments. Trans­fers be­tween ser­vice providers will only be al­lowed from 1 March 2016, at no ex­tra cost.

Con­sumers can have mul­ti­ple in­vest­ments with mul­ti­ple ser­vice providers, but they must be re­spon­si­ble in keep­ing track of their con­tri­bu­tions to var­i­ous ac­counts, says Giess­ing. “Those con­tri­bu­tions will have to be re­ported to SARS at the end of the day.”

Although the ac­counts are avail­able to all South African in­vestors, higher tax pay­ers will ben­e­fit the most. “It’s a larger por­tion of tax they won’t be pay­ing,” says Van der Merwe.

In­vest­ment prod­ucts cur­rently held by in­di­vid­u­als may not be con­verted to a tax-free prod­uct, says Grob­ler. How­ever, sub­ject to rules of cur­rently held in­vest­ments and sav­ings prod­ucts, funds can be with­drawn and rein­vested into a tax-free prod­uct.

Finweek spoke to dif­fer­ent ser­vice providers to find out about the dif­fer­ent tax-free sav­ings prod­ucts avail­able in the mar­ket.

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