Considerations for investing into a tax-free savings account
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.