Tax-free savings: Give it time
04 August 2015
Posted by: Author: Maarten Mittner
Author: Maarten Mittner (Financial Mail)
The recently introduced tax-free savings accounts have received their share of criticism. However, industry experts say the benefits exceed the negative aspects, especially for younger investors.
Individuals can choose from different types of investment funds from various financial service providers.
One of the major criticisms of the products has been that the tax-free investment amount set for individuals is too low. A maximum of R30 000/year and up to R500 000 over a lifetime in capital gains, dividends, interest earned or on withdrawals from these accounts is nontaxable.
These concessions might not be sufficient for high-earning individuals or attractive for pensioners with a sizeable retirement nest egg.
These taxpayers can be charged an individual income tax rate of up to 41% on amounts exceeding those limits.
Also, older investors might lose out on other tax breaks.
For example, the current annual exemptions in respect of tax owed on any interest-bearing asset — of R23 800 (for people under 65) and R34 500 (for people over 65) — are still in play.
National treasury is planning to phase out these interest concessions over the next couple of years and replace them with alternatives such as the current tax-free account.
Rhodes University tax professor Matthew Lester says many investors don’t have tax exposure now anyway.
They benefit from the annual interest exemptions, and residents earning below various annual thresholds don’t have to pay tax.
"That means a normal savings account of between R600 000 and R700 000 at an interest rate of 5% is already effectively a tax-free investment,” he says.
"In reality, for most South Africans the tax-free products provide only a dividend tax saving,” Lester says. He adds that this is why these accounts may appeal to younger investors, as they have a longer period to use the benefit and don’t immediately need regular dividend income.
A common misconception is that these accounts are only cash-based interest-bearing savings accounts.
Derick Ferreira, Old Mutual product head of customer and intermediary solutions, says this is not the case.
"They include a range of savings vehicles, such as exchange traded funds and unit trusts, provided they adhere to certain regulations.”
Ferreira says tax-free savings accounts will make it much easier and more attractive for South Africans to save, as no taxes are levied on income from various investment instruments, subject to limitations.
Once money is in the account one can make use of the tax concession, and the further away you are from retirement, the more sense it makes to use tax-free savings, he says.
Sanlam Personal Finance head of advice processes Danelle van Heerden says that is one of the main pitfalls of the account — investing for short periods.
To benefit from the tax relief the investment needs enough time to earn returns.
"If you invest for a short period or start drawing regular income from the account from the sixth or seventh year of investment, you will not get the maximum tax benefit,”she says.
This article first appeared on financialmail.co.za.