Are you miss­ing out on tax-free re­turns?

A re­cent sur­vey in­di­cates that many more peo­ple could be ben­e­fit­ing from tax-free sav­ings ac­counts if they knew how they worked. sep­a­rates the facts from the fic­tion.

Weekend Argus (Saturday Edition) - - GOODPUZZLES -

Na­tional Sav­ings Month should in­spire you to com­mit to save, or to save more. If you haven’t heard of tax-free sav­ings ac­counts, or don’t know how they work, you could be los­ing out on an op­por­tu­nity to boost your sav­ings.

Tax-free sav­ings ac­counts were launched some 16 months ago, but a re­cent sur­vey by San­lam has found that many peo­ple are ei­ther un­aware of these ac­counts or are mis­in­formed about them.

Tax- free sav­ings ac­counts en­able to you save with­out pay­ing the three dif­fer­ent taxes that ap­ply to in­vest­ments: in­come tax on in­ter­est, div­i­dends tax and cap­i­tal gains tax (CGT). Not hav­ing to pay these taxes is par­tic­u­larly rel­e­vant when you save over the long term, be­cause the div­i­dends, in­ter­est and growth on your cap­i­tal will com­pound sig­nif­i­cantly.

San­lam con­ducted a sur­vey among 402 peo­ple earn­ing be­tween R10 000 and R40 000 a month who said they were sav­ing or were con­sid­er­ing start­ing to save within the next six months. It found that an alarm­ing 37 per­cent of re­spon­dents did not know about tax-free sav­ings ac­counts. Only 12 per­cent of the 402 peo­ple had opened an ac­count, while 51 per­cent knew about the prod­ucts but had not opened one.

Re­cent re­search by In­tel­lidex among fi­nan­cial ser­vices com­pa­nies shows that there has been a good take-up of tax-free ac­counts: there are al­most 262 500 ac­counts with some R2.6 bil­lion in them.

In­tel­lidex, a re­search and me­dia com­pany, gath­ered in­for­ma­tion from 27 providers of tax-free sav­ings ac­counts it es­ti­mated to cover 95 per­cent of the tax-free sav­ings ac­count mar­ket. Its re­search found that about 21 per­cent of tax-free sav­ings ac­counts were opened by peo­ple who pre­vi­ously had not been sav­ing.

The San­lam sur­vey shows that, of those who have opened tax-free ac­counts, 26 per­cent are us­ing them only to save for un­fore­seen cir­cum­stances, 34 per­cent are sav­ing only for a spe­cific goal and 34 per­cent are sav­ing for both pur­poses.

Karin Muller, the head of growth mar­ket so­lu­tions at San­lam Per­sonal Fi­nance, says al­though tax-free ac­counts can be used to save for short-term goals – be­cause they are sim­ple and flex­i­ble prod­ucts – you will ben­e­fit most from the tax breaks if you in­vest for the longer term (five or more years).

The San­lam sur­vey found that more re­spon­dents were in­vest­ing in other fi­nan­cial prod­ucts, such as sav­ings ac­counts (79 per­cent), bank cash sav­ings ( 42 per­cent), shares (20 per­cent), a sav­ings club with friends (19 per­cent), an ed­u­ca­tion pol­icy (19 per­cent), a stokvel or ro­tat­ing sav­ings club (17 per­cent), unit trusts (16 per­cent) and un­banked cash sav­ings ( 15 per­cent). But they don’t un­der­stand the ben­e­fit of us­ing a tax-free sav­ings ac­count to in­vest, par­tic­u­larly in shares and unit trusts.

A much higher num­ber of those sur­veyed had a pen­sion or prov­i­dent fund (56 per­cent) and/ or a re­tire­ment an­nu­ity (RA) fund (48 per­cent).

Re­tire­ment funds have more tax ben­e­fits than tax-free sav­ings ac­counts, be­cause, in ad­di­tion to your sav­ings be­ing free of in­come tax, div­i­dends tax and CGT, you can claim a tax deduction for your con­tri­bu­tions. Be­cause your re­tire­ment fund con­tri­bu­tions are taxd­e­ductible, the amount you save will be greater than the amount you put into a tax-free sav­ings ac­count. For ex­am­ple, if you want to save a be­fore-tax amount of R500 in a taxfree sav­ings ac­count and you are on a mar­ginal tax rate of 30 per­cent, you would have only R350 to con­trib­ute (R500 x 30 per­cent = R150).

Fur­ther­more, con­tri­bu­tions to re­tire­ment funds within the tax-deduction lim­its, as well as the growth on the con­tri­bu­tions, can be passed on to your de­pen­dants free of es­tate duty.

On re­tire­ment, you pay tax on any lump sum you with­draw from your re­tire­ment fund that ex­ceeds R500 000 (or less if you made with­drawals be­fore re­tire­ment). The in­come from the an­nu­ity that mem­bers of pen­sion and RA funds are re­quired to buy with at least two-thirds of their sav­ings at re­tire­ment will also be taxed.

The draw­back of a re­tire­ment fund is that you gen­er­ally can­not ac­cess your sav­ings un­til you re­tire. (RA mem­bers can ac­cess their sav­ings only af­ter they reach the age of 55.)

You can ac­cess your re­tire­ment sav­ings if you re­sign from an em­ployer that spon­sors a pen­sion or prov­i­dent fund, but your with­drawal will be taxed at a more puni­tive rate than if you with­drew a lump sum at re­tire­ment.

There­fore, you need to have non-re­tire­ment, or dis­cre­tionary, sav­ings. Al­though the real ben­e­fit of a tax-free sav­ings ac­count can be re­alised only if you save over the long term, you can ac­cess your sav­ings when­ever you need them, and you can be charged a lim­ited with­drawal penalty only if there is a term on the in­vest­ment.

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