South Africans are notoriously bad at saving. We overspend regularly and invest too little. To encourage us to manage our money better, government is introducing tax-free investments. These accounts are intended to be long term saving vehicles, designed to help us invest for the future. They are another tool available to help us meet our financial goals over the longer term and everyone should have one!!
At Southwood Financial Planning we have reviewed the offerings from all the investment and life companies from an underlying investment and cost perspective. Depending on our clients monthly cash flow availability (between R300 and R2 500 per month), we can recommend the most appropriate option.
Should you be interested, please e-mail us with your monthly investment amount and we will take it from there.
See below for more detailed information
What is a Tax-Free Savings Account?
With effect from 1 March 2015, National Treasury introduced tax-free savings accounts (TFSA’s) to promote a savings culture amongst South Africans by allowing South African registered tax payers to invest their money in saving products on which no income tax, capital gains tax or dividend withholding tax will be charged.
These are not new investment products. Most unit trusts, exchange traded funds (ETF’s), savings accounts, fixed deposits and RSA Retail Savings Bonds meet the requirements to be classified as tax-free savings accounts. It is rather the way that SARS treats these products that is new.
You are allowed to invest R30 000 per annum in a TFSA with a lifetime limit of R500 000. Although there is no limit to the number of TFSA’s you can hold, these limits apply to your total tax-free savings and not per product provider or fund. SARS will tax any contributions that exceed these limits at 40% so annual monitoring of your contributions is important. It is also important to note that contributions are not tax deductible.
Who can Invest?
A TFSA can be held in the name of any individual (natural person) including children. All account holders will need a registered tax number and a bank account in their own name in order to transact. Legal entities and trusts will not be eligible to invest in TFSA’s.
Withdrawals can be made at any time with no penalties or tax but it is important to note that any amounts re-invested will still be subject to the annual and lifetime limits. In other words, withdrawal amounts still count towards the allowed annual and lifetime limits.
A TFSA is ideal as a long-term discretionary savings option on top of your existing retirement and discretionary savings. The products suit young investors who are investing for the long term (it takes at least 17 years to reach one’s lifetime limit) and those investors who are in the higher income tax brackets.
The benefits of these accounts are significant if held for the longer term (15 to 20 years) due to the effects of compounding and maximising the tax benefits. It is worth reading the article which featured in the South African Index Investor’s Fourth Quarter Newsletter, where Daniel Wessels, a financial advisor at Martin Eksteen Jordaan Wessels in Cape Town, compared the benefits of investing in a tax-free savings account with a typical discretionary investment. http://www.mitonoptimal.com/include/pdf/media/410/Weeklycomment.pdf
A wide range of fund options are available with minimum monthly and lump sum contributions ranging from R300 (max R2 500) and R5 000 (max R30 000) respectively. More offerings are due to introduced into the market in next few months.
Due to their long term nature, our recommendation is to invest in balanced and equity unit trust funds and index trackers to give you maximum exposure to the markets.