South Africans are notoriously poor savers. According to the SA Reserve Bank, our household savings as a percentage of our disposable income have declined over the past few years – and they are likely to continue to do so. National Treasury’s introduction of tax-free savings accounts from 1 March 2015 has therefore been widely welcomed as a way of encouraging South Africans to save. How do these accounts work? How can they help you meet your financial goals?
According to Karin Muller, head of growth market solutions at Sanlam, the main advantage of tax-free savings accounts is that no dividend, capital gains or income tax is payable, as long as contributions remain within an annual threshold amount of R30 000, and a lifetime limit of R500 000. Individual investors will also be able to access their funds at any time.
“Since you won’t pay any tax on the growth on your investment, a tax-free savings account is an effective way to save for your goals. Your money will grow faster than in a regular investment or savings account. It all depends on how long you stay invested, however – the longer you invest the more benefit you will get. Although the tax benefits will be low in the beginning, they will grow over time due to the power of compound interest, or earning investment return on investment return,” Muller says.
Individuals will be able to open multiple tax-free savings accounts with different underlying investments, as long as the annual limit and the lifetime limit of R500 000 are not exceeded. The limit only applies to the money you actually invest. You’ll be able to withdraw your money at any time, but it is important to remember that if you then decide to replace this money again, it will count towards your annual and lifetime limits.
Tax-free savings accounts or retirement annuities?
Muller says Sanlam is serious about its role to support and encourage savings. “We fully support the objectives of National Treasury with the introduction of tax-free savings accounts. However, it is important that investments in these accounts form part of a holistic financial plan, which takes into account all an individual investor’s financial needs, both short- and long-term.
“A tax-free savings account is an excellent savings solution for longer term savings, such as saving for children’s education. In most cases retirement annuities are more appropriate retirement savings vehicles. This would however depend on your own personal circumstances,” she says.
Although both retirement annuities and tax-free savings accounts earn tax-free investment returns, retirement annuities defer income tax to the post-retirement phase, whereas with tax-free savings accounts income tax is paid before every contribution is made (since you make the payments with after-tax money).
“In the long run, retirement annuities give the same or better value compared to a tax-free savings account when used for retirement saving. It is not just a case of adding up the figures, however – there are a number of other factors to consider when deciding between which savings product to use, such as protection from creditors, estate duty, liquidity and asset allocation. When saving for retirement, retirement annuities remain tops,” she says.
Source: Sanlam (www.sanlam.co.za)