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.
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.