Tax-free savings poser
BUT WILL THERE BE MONEY FOR THIS?
Government must increasingly prioritise funds for immediate concerns.
Tax-free savings accounts (TFSAs) provide a taxfree wrapper that investors can use for investments in various asset classes, by opening accounts with banks, asset managers, life insurers and stockbrokers.
Currently, individuals can invest up to R33 000 per annum in one or more TFSAs (collectively) up to a maximum of R500 000 over their lifetime. The investment returns are tax-free. When TFSAs were introduced in 2015, Treasury stopped adjusting the annual interest exemption (R23 800 for people younger than 65; R34 500 for 65s and older) in line with inflation every year. In this way, the incentive would be revenue neutral. The tax revenue the fiscus would lose by offering TFSAs would be gained by not increasing the interest exemption.
The intention was that the annual limits be increased on a regular basis for the impact of inflation, but that the lifetime limit would remain static – at least in the short term. In 2017, Treasury increased the annual limit from R30 000 to R33 000. The question is, will it do so again this year?
Significant pressure on state finances means government increasingly prioritises funds for immediate concerns (eg Eskom) and that money for savings incentives may need to wait in line.
Denver Keswell of Nedgroup Investments says as much as it would like to see an increase in the contribution limits, there hasn’t been any indication that it’ll happen this year.
“However, when the annual limit was raised to R33 000 from R30 000 two years ago it did take us by surprise, so let’s hope that happens again.”
Keswell says the hope is that SA will follow a similar trajectory to the trend of the UK equivalent, the individual savings account (ISA). About five years ago, the annual cap for ISAs was just below £12 000, but it was increased to £20 000 two years ago.
“While much of the focus to date has been on the annual contribution limits, what we would really like to see is an increase in the lifetime limit.”
By not increasing the lifetime limit, there’s an unintended consequence of a barrier to entry for any investor who intends to withdraw and replace their funds in the short- to medium-term, because once an investor withdraws funds from the account, they’re unable to replace them. If they do then ‘replace’ the funds they withdrew, they’ll be reducing their remaining allowance within the R500 000 lifetime limit, he adds.
“Obviously, this can have a real impact on an investor’s financial outcome in the tax-free investment.”
Prudential Unit Trusts’ Pieter Hugo says the only change it would like to see is an increase in the annual allowance, which hasn’t kept up with inflation.