Tax-free savings accounts taking off
NEARLY 460 000 ACCOUNTS OPENED SINCE MARCH 2015, AND INVESTMENTS NOW TOTAL OVER R5 BILLION
TAX-FREE savings accounts (TFSAs) have proved highly popular with South Africans since their launch by National Treasury just over two years ago, with the number of accounts opened in the second year growing by about 77% on those opened in the first year.
The latest Intellidex/Savetaxfree.co.za survey of tax-free savings shows that the total number of TFSAs opened since March 2015 stands at almost 460 000, and total savings at the end of February this year was R5.174 billion.
The survey covers the universe of TFSA providers: banks, collective investment schemes, linked product providers, life assurance companies and stockbrokers.
From just over 260 000 TFSAs opened in the 2015/16 tax year, the number rose to 459 848 in the 2016/17 tax year, according to the survey, which measured the period from March 1, 2016 to February 28, 2017.
Of the 207 172 new accounts opened in the past tax year, the product providers surveyed estimated that 13% were opened by first-time savers. Many of these may be TFSAs opened by parents on behalf of their children. (There are no figures on the number of accounts in the names of minors.)
TFSAs were introduced by National Treasury in March 2015 to encourage South Africans to save for the long term by eliminating the three main taxes that regular investments are subject to: dividend withholding tax on investments that pay dividends, tax on interest income, and capital gains tax.
The annual contribution limit until February 28 this year (which includes the survey period) was R30 000. It was increased in this year’s Budget to R33 000. The lifetime limit remains R500 000.
There are four main vehicles in which you can invest: bank accounts, unit trust funds, stockbroker accounts that include share portfolios and exchange traded funds (ETFs), and life assurance products such as endowment policies. For the purposes of the survey, ETFs were classified under stockbroker accounts and not under collective investment schemes, which reflect only investments in unit trust funds (see graphic).
The survey shows that the bulk of the money in TFSAs (40.7%) is in bank savings accounts, with 26.5% in life products, 20.9% in unit trust funds and 11.9% in stockbroker accounts.
This was a point of concern among some respondents, who pointed out that bank-account TFSAs are not ideal as long-term investments, because they yield low returns over the long term that are unlikely to beat inflation. They also said banks have an advantage in that they have an extensive client base they can mine for marketing tax-free accounts, and they have those clients’ Fica details on hand, making it far easier for the clients to open TFSAs. Furthermore, they say, there is a tax exemption for interest earned on cash savings, subject to limits that would easily accommodate savings in a TFSA, thereby defeating the object of using a TFSA.
However, the asset-class breakdown shows that although assets in cash rose from R1.297bn in 2016 to R2.398bn in 2017 (a difference of R1.101bn), assets in listed shares (equities) rose from R935 million to R2.051bn (a difference of R1.116bn). Looked at another way, the proportion of assets held in cash fell from to just over 47% from 51% in 2016, while assets in equities rose from 36% to 40%.This suggests that more investors are opening accounts more appropriate for longterm growth.
In a recent interview on radio station ClassicFM, Intellidex general manager Colin Anthony said the numbers were encouraging, particularly the high percentage of first-time savers, which shows that TFSAs are having the desired goal of making inroads into the target market of people who have not saved before.
Anthony said financial services providers have made their TFSAs attractive in terms of their low costs, but the initiative still needs a concerted education campaign directed at the target market.
martin.hesse@inl.co.za
THE burden on South African taxpayers is getting heavier. The top income tax bracket has been increased to 45%, and the introduction of a “wealth tax” is being debated. Using tax-efficient investment vehicles is essential if you want to preserve or generate your wealth.
You are taxed on the growth earned by your investments – the interest earned in a bank account and the dividends received from shares or unit trust funds. If you sell an investment that has made a profit, you could be liable for capital gains tax (CGT). There are some exceptions: • You are not taxed on the growth earned by investments housed within a retirement-savings vehicle such as a retirement annuity (RA) fund and a pension or provident fund;
• The first R23 800 of annual interest income is not taxed if you are under the age of 65 (R34 500 if you are over 65); and
• Investments housed in a taxfree savings account (TFSA).
National Treasury introduced TFSAs on March 1, 2015. These types of accounts have been available in other parts of the world for some time. The United Kingdom launched the tax-exempt special savings account in 1990. It was replaced by the individual savings account in 1999. Canada rolled out a TFSA in 2009.
The basic features of South African TFSAs are:
• You do not pay any income tax, dividends tax or CGT on the returns earned by your investments.
• The maximum contribution is R33 000 per tax year, or R2 750 a month. (The limit was increased from R30 000 to R33 000 on March 1 this year.)
• There is a lifetime contribution limit of R500 000 per person.
• If you exceed the contribution limits, you will be liable for tax of 40% on the excess amount.
• If you do not contribute the maximum amount in a tax year, you cannot carry the shortfall forward to top up your contribution in the following next tax year.
• Only individuals can use a TFSA; a trust or business cannot open this account.
• An account can be opened in the name of a minor as long as he or she has a tax number.
• You can withdraw your money at any time without paying a penalty, but any withdrawals are not taken into account when your annual or lifetime contribution limit is calculated.
Given the restriction on how much you can contribute, it could be argued that the case for TFSAs is limited. After all, R500 000 over your lifetime is not a massive amount in the grand scheme of things.
RETIREMENT BENEFIT
So why not invest all your funds in an RA, which does not have contribution limits, and where your investment growth is also tax-exempt? Furthermore, your contributions to an RA are tax-deductible, although the deduction is capped at R350 000 per tax year.
These are valid points, but you can access an RA only when you are 55, and when you do, you will be back on the radar of the South African Revenue Service. If the value of your RA is more than R247 500, you are required by law to commute at least two-thirds of your fund value to either a life (or guaranteed) annuity or a living annuity, or a combination of the two. The annuity will pay you an income, which will be taxable. The first R500 000 of a cash lump sum taken at retirement is tax-free.
By drawing a taxfree income from your TFSA in retirement, you can considerably enhance your retirement income and lower your tax burden. But this will be the case only if you invest over the long term and do not make any withdrawals. The higher the value of your TFSA at retirement, the more tax-free income you can withdraw and the less tax you pay.
The graph shows the growth in a TFSA in today’s terms assuming an average annual return of 4% above inflation. If you contribute the maximum of R33 000 a year (assuming that the current contribution limits stay the same until you reach retirement), you will reach your lifetime contribution limit of R500 000 in just over 15 years, when, assuming growth of 4% above inflation, your TFSA investment will have a market of value of about R690 000 in today’s terms.
LONG-TERM INVESTMENT
I recommend that you allow your investment to grow for as long as possible and invest in growth assets such as equities and listed property.
From the examples above, it is clear that the longer you stay invested in a TFSA, the greater your potential tax saving.
Given the nature of a TFSA, I recommend that you use it only for long-term investing, with retirement in mind for the best results.
Your circumstances may not allow you to have an investment time-frame of 60 years, like Max, or contribute R33 000 a year, like Sarah, but nothing prevents you from taking advantage of the taxfree nature of this account.
A TFSA should be a part of your retirement plan, and I recommend that every South African with a tax number invests in one of these accounts.
However, a TFSA is not meant to replace a retirement-savings vehicle, such as a company pension fund or an RA. Instead, I see a TFSA as the “unsung hero” in your golden years that can reduce your annual tax liability and free up money that can be spent or invested.