Tax-free savings offer offshore benefits
TAX-FREE savings accounts are one of the most useful savings vehicles in South Africa because you do not need to pay tax on investment growth. It is however important to invest your money in a tax-free savings account (TFSA) correctly to ensure you obtain tax benefits.
“It is not necessarily a good idea to use a taxfree savings account to invest in a fixed deposit, or a short-term interest bearing account,” explains Grant Locke, head of OUTvest, a wholly owned subsidiary of OUTsurance Holdings Limited.
“This is because the first R23 800 of annual interest income earned is currently not taxed.
“To earn more than R23 800 annual interest and therefore enjoy the benefits of additional income qualifying for tax free status, you would need to have roughly R300 000 invested in a fixed deposit or similar account earning approximately 8% per annum.
‘Because contributions to tax free savings accounts are restricted to R33 000 per annum, it would take about 10 years to accumulate that amount of capital.
“It will therefore take a long time before you realise any benefit in this scenario.
A TFSA gives you the flexibility of being able to invest in a wide range of investment vehicles, including unit trusts and exchange traded funds.
However, the problem is that unless you are a professional, it is not always clear as to when it is advantageous to use a TFSA and when not.
“OUTvest has built an online advice system that will help you understand when it may be a good idea to use a TFSA.
“The system takes into account your goal, your contributions and the suggested investment portfolio to help you decide whether a TFSA is appropriate or not – all online.
“An interesting way to use tax-free savings accounts is as a part of your retirement savings. This is because you have much more flexibility in which to invest.
‘For example, you could invest all of your taxfree savings allowance in overseas companies if you want, whilst you would ordinarily only be allowed 25% offshore exposure in a retirement annuity.
“Secondly, if for some reason you fall on hard times, you can take some money out of a tax-free savings account – which you cannot do with a retirement annuity.”
The other useful aspect to a TFSA is that you do not have to use only one provider. You can have tax-free savings accounts with a number of providers, as long as you do not contribute more than R33 000 per tax year (from February to March).
However, the onus is on you to ensure that this does not happen; otherwise, the penalties can be severe.
You can track your contributions across all your OUTvest goals to ensure you do not exceed the maximum annual contribution,” concludes Locke.
OUTvest offers goal based advice and passive investment solutions, via a website and an app, combining sophisticated technology and financial advisors based in a call centre.
The service includes an intuitive do-it-yourself digital front end, low fees and intelligent goal-based calculators, which help investors understand how much to save to achieve their goals and whether a tax-free savings account is recommended.
Clients benefit from both algorithmic passive investment strategies and professional human advice.