Tax-free sav­ings of­fer off­shore ben­e­fits

The Mercury - - TAX-FREE SAVINGS - Grant Locke, Head of OUTvest

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.

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