MAKE YOUR SAVINGS GROW WITH TAX-FREE ACCOUNTS & INVESTING
Make Your Savings Grow With Tax-Free Accounts & Investing
SOUTH AFRICANS NEED TO PAY MORE ATTENTION TO HOW MUCH MONEY THEY’RE PUTTING AWAY EACH MONTH. TWO OF THE BEST WAYS TO DO THIS IS WITH A TAX-FREE SAVINGS ACCOUNT, AND A PORTFOLIO OF INVESTMENTS.
The latest Investec and GIBS (Gordon Institute of Business Science) Savings Index, which measures South Africa’s savings rate and the country’s savings behaviour, states that South Africa scored 60.5 points at the end of 2017.With the pass mark being 100, this does not bode well for the country’s savings culture.
“A culture of saving at every level of society is critical to the well-being of our citizens, and to the sustained economic health of our country,” says René Grobler, Head of Investec Cash Investments and who spearheaded the creation of the Investec GIBS Savings Index in 2016 with the aim of creating more visibility around the importance of savings in South Africa. “Programmes that promote personal saving and financial education are as important as sound economic policies.”
Grobler goes on to state that tax-free savings accounts, tax incentives for retirement savings, and initiatives such as Savings Month are positive means of promoting a savings culture.
Having a healthy savings account is important for numerous reasons. If you lose your job and therefore cannot rely on your salary to buy necessities, savings can sustain you while you’re on the job hunt. If your car breaks down and insurance won’t cover the costs, you’ll be glad you put money away each month to cover the cost of repairs. And so the list goes on.The main message is that saving money is important.
To make the most of your money, you want to earn interest and grow the capital amount you put in your account.
GOING THE TAX-FREE ROUTE
The tax-free account initiative began in 2015 to encourage South Africans to save money, and since then many financial companies have introduced tax-free savings accounts products. Not all of these products are the same though.
While the products may all be deemed “tax-free” accounts, they work with your money differently. From money market or fixed-term bank accounts, to unit trust investments or JSElisted exchange traded funds, tax-free savings account can take many forms.
Firstly, what is meant by “tax-free”? The difference between tax-free bank accounts and tax-free investments is that there is no tax on interest in a bank account, whereas with an investment, there is opportunity for greater capital growth and no tax on any dividends or capital gains. While you might be “saving” on the tax front, it is important to take into account that you will still have fees and transaction costs to pay.
There are rules when it comes to how much money you can have in your tax-free account.You can invest R30,000 a year, or R2,500 a month, in a tax-free investment to a lifetime maximum of R500,000.
Wouter Fourie, Managing Director of Ascor Independent Wealth Managers, told Fin24 that in order to really benefit from a tax-free savings account, you should reach the R500,000 limit as soon as possible, then you can watch compound interest work its magic. He also cautions investors not to go above the annual R30,000-a-year limit, as you could then incur tax penalties.
INVESTING IN YOUR FUTURE
If you would prefer to go the more traditional route of investing your money, there are numerous ways of doing this. Financial companies have an array of different investment options, from 32-day fixed-deposit accounts, to unit trusts and offshore investments.
FNB’s 32 Day Flexi Notice account, with a minimum opening deposit of R1,000, offers a maximum nominal interest rate of 6.95 % over 12 months.The interest that you receive can either be reinvested into the account, or paid to you.Your initial capital deposit is 100 % guaranteed and no fees are charged, making this a safe option for the risk-adverse.You also need to give the bank 32 days’ notice before drawing money – this will give you just over a month to decide whether that new sound system or designer handbag is really worth it.
A trust is a portfolio of stock-exchange securities in which small investors can buy units. With a unit trust account, you can purchase many units as an investment. With Allan Grey, for example, you can choose how risky you want to get with a unit trust account – from the Money Market Fund, which is the most stable option, to the high-risk Equity Fund, with more fluctuation.
If you go for the riskier alternative, it is important not to panic when you see your investment go down – this type of account is designed for the long term, and you have to ride the waves. So for short-term savings, such as vacation funds, a more conservative option is preferable.
Should you wish to broaden your horizons and learn how to invest money yourself – thereby cutting out investment companies – there are short courses (such as the one offered by GetSmarter on Investment Management) and portals where you can invest in some of your favourite companies. One such portal is Easy Equities. But remember that the money you earn on your investments is subject to tax.
Due to the multitude of tax-free accounts and investment options, it is worth doing some research into the vast pool of options available to find what suits your needs best – whether it’s saving for a child’s education, your retirement, or an overseas holiday, there are savings options for you.
All in all, putting money away when you have money is essential – your future self will be less stressed and certainly thankful.