Trea­sury’s new sav­ings con­ces­sions come with re­spon­si­bil­i­ties, writes Phakamisa Ndzamela

Financial Mail - Investors Monthly - - Contents -

Im­por­tant to un­der­stand the risks and what you are charged for

To ben­e­fit op­ti­mally from the tax-free sav­ings ac­counts that have come into the South African fi­nan­cial mar­kets, savers have a duty to as­sess which in­sti­tu­tions pay the best re­turns on the cap­i­tal they in­vest, and they need to look care­fully at how the fees com­pare. It is also nec­es­sary to un­der­stand the po­ten­tial risks in­volved in the tax-free sav­ings ac­count the ser­vice providers of­fer.

From March 1 this year in­di­vid­u­als have been al­lowed to save a max­i­mum of R30 000 an­nu­ally and R500 000 over their life­time with­out be­ing taxed. The time limit for the an­nual amount cov­ers the pe­riod March 1 to the end of Fe­bru­ary the fol­low­ing year.

The new reg­u­la­tion forms part of gov­ern­ment’s plan to en­cour­age sav­ing by of­fer­ing tax-free in­cen­tives. The Trea­sury has said the re­turns, which may come in the form of in­ter­est, div­i­dends and cap­i­tal growth, will not at­tract in­come, div­i­dends or cap­i­tal gains tax. It will take some­one about 16½ years to reach the life­time limit of R500 000 if he or she saves the max­i­mum R30 000/year.

The var­i­ous fi­nan­cial in­sti­tu­tions have dif­fer­ent re­quire­ments re­gard­ing the min­i­mum amounts to be de­posited in th­ese ac­counts.

Over time sav­ings can ex­ceed the R500 000 life­time limit due to earn­ings they at­tract, such as in­ter­est and cap­i­tal gained. This will not be pe­nalised.

Fi­nan­cial firms have re­sponded with an ar­ray of prod­ucts, and savers will have to choose which in­sti­tu­tion has the of­fer­ing that best suits their needs. Firms that have put such sav­ings prod­ucts on the mar­ket in­clude banks, in­sur­ers, wealth man­agers, stock­bro­kers, linked in­vest­ment ser­vice providers and gov­ern­ment (through its re­tail sav­ings bond prod­uct). Peo­ple can even get ex­po­sure to eq­uity mar­kets. How­ever, it is im­por­tant to un­der­stand the risks and what you are charged for.

Owen Nkomo, founder of Inkunzi In­vest­ments, notes that most funds are ex­posed to money mar­ket or fixed in­come so­lu­tions, which of­ten have low re­turns. Money mar­ket funds have their own risk. This was demon­strated when African Bank In­vest­ments failed last year, leav­ing many savers with money mar­ket ac­counts with re­duced sav­ings.

“The ones with eq­uity ex­po­sure present clients with huge mar­ket risk as they are mostly based on ex­change traded funds (ETFs). This elim­i­nates the al­pha-gen­er­a­tion ca­pac­ity [ad­di­tional re­turns above the mar­ket] of some qual­ity fund man­agers, and in­creases the risk pro­file if the ETFs used are not op­ti­mised well.

“But this is mit­i­gated by the fact that most peo­ple who in­vest in ETFs un­der­stand that they have opted for low-cost mar­ket-match­ing re­turns and [know] the risk,” says Nkomo.

“Most ac­tive man­agers can­not pro­vide so­lu­tions, as they charge per­for­mance fees, and by virtue of their stan­dard man­age­ment fees be­ing high, they do not meet the na­tional Trea­sury frame­work for low­er­ing in­vest­ment costs, es­pe­cially if ad­viser fees are fac­tored in.”

If peo­ple save less than R30 000/year, they can­not save more than R30 000 the fol­low­ing year to make up for the pre­vi­ous year’s short­fall.

The Trea­sury points out in its guide­lines that the an­nual limit is aimed at ad­dress­ing pro­cras­ti­na­tion by savers who de­lay putting money aside.

“If an in­di­vid­ual misses the [an­nual] dead­line, they lose out on tax-free re­turns on that amount for as long as that amount would have been in the ac­count. The an­nual limit plays the part of en­cour­ag­ing sav­ing in the short term, for fu­ture ben­e­fit. If peo­ple were al­lowed to roll over any un­used amount, there would no longer be a spe­cific end point for their sav­ings, and they would most likely put off sav­ing the money ‘un­til later’.”

Savers can have mul­ti­ple tax-free sav­ings ac­counts as long as they do not ex­ceed the sav­ings limit in to­tal. Peo­ple have a duty to mon­i­tor their sav­ings thresh­old and those who breach this will be pe­nalised. The Trea­sury has said that con­tri­bu­tions over the R30 000 an­nual limit or life­time limit of R500 000 will in­cur a 40% tax penalty. To en­cour­age com­pe­ti­tion, it has al­lowed for savers to trans­fer their sav­ings to the ser­vice provider deemed best suited to their needs. But peo­ple will have to un­der­stand the terms and con­di­tions that come with with­draw­ing and trans­fer­ring the cap­i­tal to an­other fi­nan­cial ser­vices com­pany.

Some ser­vices providers will charge an exit penalty.

To avoid un­nec­es­sary risks, peo­ple will have to be vig­i­lant to avoid pyra­mid schemes, and must en­sure that the in­sti­tu­tions they are sav­ing with are reg­is­tered fi­nan­cial ser­vice providers.


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