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BusinessDay www.businessday.co.za Tuesday 25 January 2022
INSIGHTS
TAX-FREE SAVINGS
GLUTEN-FREE, DAIRY-FREE, SUGAR-FREE. NOTHING’S AS GOOD AS TAX-FREE.
For more on tax free investing, visit www.satrix.co.za Satrix Managers (RF) (Pty) Ltd (FSB no. 15658) is an authorised financial services provider and a registered and approved manager in terms of the Collective Investment Schemes Control Act.
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Adopt a ‘first in, last out’ approach
opportunity to reap the best benefits, writes Lynette Dicey
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iving through a global health and economic crisis has taught investors and savers not to take anything for granted. Many South Africans suffered deep losses during this tough time and are concerned about the uncertainty that lies ahead. Despite the uncertainty, the one thing investors can be more predictable about is how they
Pieter Koekemoer … plan ahead. respond in times of crisis. “Focusing on doing the best we can with what we have, and to plan ahead as best we can to secure our futures, is something we can all do to regain control of our lives,” says Pieter
Koekemoer, head of Personal Investments at Coronation Fund Managers. Investing tax free is an opportunity to do just that, he adds. “Don’t wait to take advantage of tax-free investing,” he urges. “The current tax year ends on February 28 2022, which means you have time to ensure you take full advantage this year of the valuable perk offered by government to encourage South Africans to save — an annual allowance of R36,000 that can be invested tax free.” A tax-free investment means the investor pays no tax on their investment gains, the latter which includes interest income, dividends and capital gains, which ultimately boosts their realised investment return. “Think ‘first in, last out’ when
Options: investors are spoilt for choice South Africans are notorious for being poor savers with more of a debt culture than a savings culture and one of the lowest household savings rates globally. To encourage a better culture of savings, in 2015 the government introduced tax-free savings accounts (TFSAs) which allow investors to contribute a maximum of R36,000 a year, with a total cap of R500,000 over their lifetime, to a tax-free savings account. The capped amounts only refer to the capital contribution and don’t include the growth on the investments which is why TFSAs are a good idea to use as a buffer to retirement savings or even an investment for children’s educations, explains Thulisile Nkomo, a private wealth manager at NFB Private Wealth. “If the funds are used as a buffer at retirement, the investor can limit the drawing on their annuity investments which reduces their tax liability,” she says. However, while there is technically no limit to the contributions made to a TFSA, contributing more than R36,000 per annum is not a good idea as any sum higher than the annual limit is taxed at 40%, says Nonnie Canham, a private wealth manager at NFB Private Wealth. Not only do TFSAs not carry any tax charges, but they have numerous benefits including flexibility and higher returns compared to traditional investment products.
RANGE OF FUNDS
“The number of tax-free savings account options have increased significantly over time and investors are spoilt for choice,” says Nkomo, adding that investors can choose to invest in money market instruments through banks, or a range of funds including equity, property, bonds and cash, as well as exchange traded funds (ETFs) either locally or globally. “Make sure the service provider is a registered financial service provider and has a licence to sell TFSAs,” she advises. Due to the long-term nature of tax-free savings, the tax benefits, accessibility and flexibility, TFSAs are often considered as part of a
Thulisile Nkomo … buffer. retirement savings plan. Combined with retirement fund savings they are an opportunity to boost a retirement nest egg with a taxfree lump sum at retirement.
RAs VERSUS TFSAs
Given that TFSAs are better utilised when saving for the long term, it’s important to resist the temptation to make early withdrawals. While it’s certainly not a bad idea to use a TFSA account to save for a minor child, Canham maintains that a retirement annuity is ultimately a better option than a TFSA. “The danger with a TFSA is that because withdrawals can be made at any time, parents dip into these accounts when life ‘happens’. Not only does this deplete what has been saved for the child, but it uses up their lifetime contribution limit given that refunding this investment is
Nonnie Canham … TFSA and RA.
not an option,” she says. “If, for example, you invested R200,000 into your child’s TFSA and you make a full withdrawal, the child’s lifetime contribution limit to the TFSA is now reduced to R300,000 from R500,000, which makes it harder to achieve the benefits of compound interest.” The same, says Canham, applies if you are investing in a TFSA for your own benefit. “Ultimately, the TFSA structure should be used only with a long-term savings strategy in mind so as not to waste the lifetime contribution limit.” She says that when it comes to a long-term savings plan for a minor child, a retirement annuity is a better option as nobody — not even the child — can access the investment prior to them turning 55, unless it is valued at R15,000 or less. When it comes to the most tax efficient structures in retirement, Canham maintains that the best long-term value is to have both a TFSA and a retirement annuity. “This way you can lower your income tax in your retirement years by drawing an income from both structures. If, for example, you require a monthly income of R50,000, you could benefit by drawing R30,000 a month from your pension or living annuity and taking the balance from your TFSA. Because the R20,000 drawn from the TFSA will be tax free, you will only be paying tax on the R30,000.”
/123RF — DESIGNER491 it comes to investing tax free,” says Koekemoer. “We encourage tax-free investors to build up towards their lifetime limit as early as possible in their investment journey and then to keep that money invested for as long as possible as they build up to a healthy nest egg.” If extra money is available outside of a retirement fund to invest for themselves or their children, Koekemoer suggests taking advantage of the annual tax-free allowance. “By starting to invest tax free early, you give yourself the best opportunity to begin reaping the benefits of compound interest early on your investment journey,” he says.
When it comes to tax-free investing, investors can withdraw their cash whenever they like. The catch is they can’t put it back. All amounts invested count towards their annual limit of R36,000 and lifetime limit of R500,000 which are tax free, regardless of any withdrawals made. “In other words, you can’t
A TAX-FREE INVESTMENT IS MONEY THAT SHOULD IDEALLY BE LEFT INVESTED FOR AS LONG AS POSSIBLE
Growing SA’s savings culture South Africans are notoriously poor savers with one of the lowest household savings rates in the world. Even though disposable incomes have increased in recent years, this has not translated into higher savings with the ratio of household savings to disposable income in negative territory. Household savings took a knock during the Covid-19 pandemic. According to Statistics SA, the household savings rate increased to 1.2% in the third quarter of 2021, up from 0.3% in the second quarter
/123RF — SZEFEI
Invest in your best life, tax free. Make the most of your annual tax-free investment allowance by investing sooner rather than later in a Coronation Tax-Free investment. By starting early and staying invested, your money gets the maximum benefit of compound growth (year after year) with zero tax on your investment growth. That’s no income, dividends or capital gains tax. So what are you waiting for? R250 per month is all it takes to start investing in your best life, tax free.
ESTATE DUTY
While TFSAs offer more control with regard to who receives the proceeds once the investor has died, this is at the expense of having to pay estate duty on the sum accumulated within the TFSA. A retirement annuity, on the other hand, allows the proceeds to pass directly to the beneficiaries, leaving the ultimate decision regarding who those beneficiaries are to the trustees of the fund. “It’s important to know that even though the investor may have nominated beneficiaries, the trustees will do their own investigations to ascertain who was dependent on the investor and should therefore be included as a beneficiary,” says Canham, adding the final decision resides with the trustees and not the investor.
of 2021 and up from 0.5% in the fourth quarter of 2020. A lack of savings led to many South Africans struggling financially at the onset of the Covid-19 pandemic as a result of loss of income or reduced income. This poor savings culture has a knock-on effect on the government fiscus as more people are dependent on social grants at retirement. Research conducted by Kantar reveals it’s not that South Africans don’t want to save, but rather they find it difficult to understand formal savings offerings and have a perception that formal savings products are targeted at high net worth individuals. In response, the Association of Savings and Investments SA (Asisa) established an online financial education hub SmartAboutMoney.co.za aimed at providing consumers with access to accurate, unbiased, plain-language information about regulated financial products and services to encourage a savings culture. The platform has been designed to be brand agnostic and makes no product pushes.
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‘replace’ the money you withdraw with a new investment,” Koekemoer explains. “This is why we encourage investors to start building up to that lifetime limit as early as possible to maximise the time it has to benefit from compound interest.” Ultimately, a tax-free investment is money that should ideally be left invested for as long as possible. The longer the money is left invested tax free, the harder compounding will work. That means a tax-free investment is not a good idea for a short-term investment goal such as a holiday or a deposit on a car. If that is the goal, find a different investment vehicle and rather allow the tax-free investment to simmer, says Koekemoer. “Investing over multiple decades, and leaving that money invested, allows it to withstand the effects of short-term market volatility typical of the financial markets. Over the long term, the bumps smooth out and the overall trend is for that investment to grow,” he says. A tax-free investment can start with a monthly debit order from as little as R250 or a lump sum investment ranging anywhere from R5,000 to R36,000. An existing tax-free savings account with a bank can be switched to a tax-free investment at no cost.
Good things come to those who don’t wait to invest.
Coronation is an authorised financial services provider.