Con­sid­er­a­tions for in­vest­ing into a tax-free sav­ings ac­count

The Star Early Edition - - NEWS -

AC­CORD­ING to the Study of Tax-Free Sav­ings in SA con­ducted by fi­nan­cial ser­vices re­search house In­tel­lidex last year, there were more than 260 000 tax-free sav­ings ac­counts with sav­ings to­talling more than R2-bil­lion since the in­tro­duc­tion of the sav­ings ve­hi­cle in the coun­try in March 2015.

The en­cour­ag­ing take up of taxfree sav­ings ac­counts in South Africa sub­stan­ti­ates the prod­uct’s im­por­tant role in en­cour­ag­ing more South Africans to save, ac­cord­ing to Tan­di­s­izwe Mahlut­shana, ex­ec­u­tive of mar­ket­ing at PPS In­vest­ments.

He says the study es­ti­mates that 21 per­cent of tax-free sav­ings ac­counts were opened by first-time savers.

“We fur­ther an­tic­i­pate that more South Africans will open tax free sav­ings ac­counts (for their chil­dren as well) and that this com­pelling sav­ings ve­hi­cle will be­come an in­te­gral part of per­sonal bud­get­ing and fi­nan­cial plan­ning,” says Mahlut­shana.

“For peo­ple still con­sid­er­ing whether to open a tax-free sav­ings ac­count there are some con­sid­er­a­tions to take note of. Im­por­tantly, we also highly rec­om­mend that these con­sid­er­a­tions are dis­cussed in de­tail with an ac­cred­ited fi­nan­cial plan­ner be­fore any in­vest­ment de­ci­sions are made.”

Mahlut­shana rec­om­mends that a tax-free sav­ings ac­count should be an im­por­tant facet of an­nual tax plan­ning.

He says an in­vestor’s con­tri­bu­tion to a tax-free sav­ings ac­count should ideally be re­viewed on an an­nual ba­sis.

An op­por­tune time to do so is to­wards the end of each tax year as part of the an­nual tax plan­ning con­ver­sa­tion with a fi­nan­cial plan­ner, which should en­able them to de­ter­mine if their re­tire­ment an­nu­ity con­tri­bu­tions dur­ing the year war­rant an al­lo­ca­tion to a tax free sav­ings ac­count.

“A tax-free sav­ings ac­count should not be the only in­vest­ment ve­hi­cle an in­vestor uses,” says Mahlut­shana.

“A tax free sav­ings ac­count al­lows in­vestors to con­trib­ute a max­i­mum al­low­able amount with­out be­ing charged cap­i­tal gains tax (CGT) when ac­cess­ing these sav­ings or switch­ing funds, div­i­dend tax when re­ceiv­ing div­i­dends, or in­come tax on in­ter­est earned on these con­tri­bu­tion amounts. All pro­ceeds are tax-free in their hands.

“Given the con­tri­bu­tion lim­its of R30 000 per year and R500 000 in to­tal, it should not be the only in­vest­ment ve­hi­cle used, but it is a valu­able el­e­ment to in­cor­po­rate into a broader fi­nan­cial plan.”

Mahlut­shana ad­vises that a tax free sav­ings ac­count should sup­port, not re­place a re­tire­ment sav­ings plan.

“A tax free sav­ings ac­count should be an en­hance­ment to a re­tire­ment sav­ings plan, not a re­place­ment. The tax-free sav­ings ac­count should ideally be con­sid­ered only once an in­vestor is al­ready con­tribut­ing suf­fi­ciently to a re­tire­ment sav­ings fund.

“Re­tire­ment an­nu­ity funds, pen­sion funds and prov­i­dent funds are ideally the first op­tions for re­tire­ment sav­ings. With these op­tions, not only is in­ter­est earned, div­i­dends re­ceived and cap­i­tal growth tax free, but a tax ben­e­fit is re­ceived on con­tri­bu­tions to these funds.

“There is how­ever a tax im­pli­ca­tion on these sav­ings at re­tire­ment when mak­ing with­drawals and when re­ceiv­ing an­nu­ity in­come from these sav­ings af­ter re­tire­ment.

“This is true up to a cer­tain con­tri­bu­tion size.

“How­ever, beyond the op­ti­mal RA con­tri­bu­tion size for a given tax year, an an­nual tax-free sav­ings ac­count con­tri­bu­tion can be­come a bet­ter sav­ings op­tion than an ad­di­tional re­tire­ment fund con­tri­bu­tion.”

Lastly, Mahlut­shana says a tax free sav­ings ac­count should not be treated as a short-term in­vest­ment.

He in­forms that the tax-free sav­ings ac­count pro­vides the great­est ben­e­fit as a long-term sav­ings ve­hi­cle and is best used in com­bi­na­tion with ex­ist­ing re­tire­ment sav­ings for post-re­tire­ment sup­port.

“Us­ing the tax-free sav­ings ac­count for short-term goals could im­pact neg­a­tively on the tax­a­tion of fu­ture long-term sav­ings, while us­ing the tax-free sav­ings ac­count for longterm goals could pro­vide a sig­nif­i­cant tax re­lief.

“When sav­ing for short-term goals like a hol­i­day or school fees, it is still worth in­vestors con­sid­er­ing a nor­mal dis­cre­tionary sav­ings ac­count in­stead, with the guid­ance of an ac­cred­ited fi­nan­cial plan­ner.”

Mahlut­shana says prob­a­bly the most im­por­tant con­sid­er­a­tion of all when plan­ning one’s per­sonal fi­nances is to en­sure that this process is done with an ac­cred­ited fi­nan­cial plan­ner.

Tan­di­s­izwe Mahlut­shana, Ex­ec­u­tive of Mar­ket­ing at PPS In­vest­ments.

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