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BusinessDay www.businessday.co.za Wednesday 17 March 2021
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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Investing for the long term
Tax incentives can make a significant difference to •your rainy day provisions, writes Lynette Dicey
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tatistics suggest people don’t necessarily save because they earn a lot of money, but rather because they believe it is a priority — regardless of how much money they earn. Although tax should not be the only, or even the main, consideration when making investment decisions, tax incentives can make a significant difference to your savings in the long run. One such incentive is the tax-free savings account. Government introduced taxfree savings accounts in March 2015 as an incentive to encourage household savings, explains Thamsanqa Cele, head of Savings and Investments at Absa Retail and Business Bank SA. Only authorised institutions such as banks, asset managers, government or long-term insurers may offer tax-free investments. Savings accounts, fixed deposit accounts, unit trusts, retail savings bonds as well as exchange-traded funds
Thamsanqa Cele … annual limits. (ETFs) that are classified as collective investment schemes qualify as tax-free investments. Consumers do not have to pay income tax, dividends tax or capital gains tax on the returns these accounts generate. But investors may only contribute a maximum of up to R36,000 per annum to these accounts during the tax year (March 1 to February 28). The lifetime contribution limit is R500,000. Cele explains that shortfalls to the limitations do not roll
over. In other words, if you allocate R30,000 towards your tax-free savings account in year one, it doesn’t mean you can contribute R42,000 in year two. The contribution will still be capped at R36,000 for the tax year. Any overcontributions are subject to a tax penalty. A consumer may open multiple tax-free investments or savings accounts, but they will still be limited to the annual total limits per tax year, Cele says. This limitation also applies if a consumer opens these types of accounts on behalf of their children. In this instance, the account must be opened in the name of the child, so it does not impact the annual or lifetime limits of the guardian or parent. Investors have access to their money at any point, but the benefits of the tax-free account only really come to the fore in the long run as time allows for compound interest to work its magic. “If you know you are going to need the money in the next year or two, it may be best to opt for an alternative investment vehicle,” Cele adds.
Ways to take advantage of tax breaks Since 2016 contributions paid to pension funds, provident funds and retirement annuity funds are tax deductible. However, this tax deduction is limited to 27.5% of taxable income or remuneration — whichever is higher — and is subject to a maximum of R350,000 a year. Any portion not claimed as a tax deduction in the year of assessment is rolled over to the following year of assessment. If, at retirement, an individual has accumulated contributions that were not tax deductible for tax purposes in prior years or the current year of assessment, this amount can be taken as a taxfree lump sum or can be used to offset the tax they pay on the monthly pension they will need to purchase when they no
longer earn a salary. There are ways to take advantage of tax breaks, reveals Trisha Jorge, head of Retail at Sygnia. Taxable income is reduced by the amount of contributions paid to a pension or provident fund. To take advantage of tax breaks, she suggests checking with your employer whether you can select a higher contribution rate or if you can make additional voluntary contributions. “Most retirement funds encourage you to make additional voluntary contributions which can be done as a lump sum or a recurring payment. The payment, however, must be deducted from your salary and paid into your retirement fund
Trisha Jorge … contributions. by your employer, and not paid by yourself,” she explains. The same tax deductibility rules applicable to pension and
provident funds apply to retirement annuity funds. However, says Jorge, if you have established a retirement annuity fund in your own capacity, you will have to increase your (post-tax) contributions to take advantage of the tax breaks. While the Pension Funds Act protects retirements savings from creditors, and the investment growth on contributions is protected from virtually all forms of taxation, on retirement individuals may take a maximum of one-third of their retirement savings as a cash lump sum — which is subject to tax — while the balance must be used to purchase a pension. In other words, a retirement annuity fund provides upfront
tax breaks in the form of taxdeductible contributions, but retirement benefits are taxed. Investment options in a retirement annuity are governed by Regulation 28 of the Pension Funds Act which limits investments in particular assets. A maximum of 75% can be invested in listed equities while a maximum of 30% can be invested offshore. From March 1 this year retirement benefits for members in provident funds have been aligned to pension funds which means that contributions made after this date are subject to annuitisation rules (unless you are age 55 and over on March 1 2021 and remain in your retirement fund until normal retirement date).
What to look out for in tax-free investment products The rules around tax-free savings accounts are clear: every provider must subscribe to the same regulations so that the vehicle itself is the same across product providers, explains Sygnia’s head of Retail, Trisha Jorge. The differences come in terms of investment options and fees. In 2013, government brought in an international actuary to survey the retirement fund landscape, resulting in a white paper called “Charges in South African Retirement Funds”.
The findings were eyeopening: “A regular saver who reduces the charges on their retirement account from 2.5% of assets each year to 0.5% of assets annually would receive a benefit 60% greater at retirement after 40 years. For someone who is a member of a preservation fund for 30 years this increases to 80%.” Bearing this in mind, says Jorge, to maximise investment returns and benefit from compounded growth, a significant portion — or even all — the investment needs to be in
equities. Conversely, using conservative investment portfolios such as a money market portfolio in a tax-free savings account may not provide the desired results. It’s therefore worth getting advice or doing research around the importance of asset allocation. “In addition, pay attention to investment fees, because as the white paper clearly indicates, the lower the fees the better the outcome — all else being equal,” she says. “As a result, it’s important to understand the fees you are paying: if they are
too high chat to your provider to see if they can be reduced. If they can’t be reduced, move your tax-free savings account to another provider.” The other option is to stop contributing to the expensive account and simply start a more cost-effective account with another provider. However, should you decide to transfer between providers, it’s important to ensure it is an actual transfer and not a withdrawal from one tax-free savings account and reinvestment into another
which will be seen as separate withdrawals and investments and may result in your contribution being double counted for the year of assessment, she cautions. Adds Jorge: “Don’t be fooled by the assumed security of investing with a big brand — focus on the quality of the investment product and try to minimise your fees. Hardearned savings should not be eroded by layers of platform and administration fees: keep it simple and try to avoid paying these types of fees.”
With Absa’s various tax-free account options, I can grow my long-term savings in a way that’s cost-effective for me. Designed to help you achieve your personal long-term aspirations, Absa’s Tax-free Savings and Tax Free Fixed Deposit Accounts give you the opportunity to save your money and enjoy the returns, tax-free. You can now put away as little as R1 000 or make a lump sum deposit of R36 000, once-off. Part of us doing more, is enabling you to meet your life-long goals and dreams, whatever they may be. Open an Absa Tax-free Savings or Tax Free Fixed Deposit Account today. Apply now: www.absa.co.za/taxfreeproducts Call 0860 11 15 15 or visit your nearest branch.
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