Reforms could increase interest in tax free savings
02 February 2016
Posted by: Author: Fin24
The so called T-day reforms will be implemented on March 1 2016 and is likely to spark a surge of renewed interest in income tax deductions and capital accumulation for retirement, according to Derick Ferreira, a senior manager at Old Mutual.
Tax free savings accounts (TFSAs), which were introduced by the government last year to encourage a culture of saving among SA consumers is one such an example and now followed by increased allowable income tax deductions in respect of all approved pension, provident and retirement funds.
Ferreira explains that the new tax laws, which will come into effect on March 1 (T-day), aim to harmonise the tax treatment of all retirement funds (pension, provident and retirement annuity funds).
"The new law allows for a 27.5% (of the greater of member’s remuneration or taxable income) tax deduction on the combined contributions up to R350 000 in total per year made to an individual’s pension, provident and retirement annuity funds.
Ferreira says he expects the tax law changes to lead to an upsurge of interest in retirement annuities, pension funds, provident funds and TFSAs this year as investors and retirees look at savings options that offer them maximum income tax concessions and in the case of TFSA’s, full access to their savings.
"TFSAs are an ideal vehicle for topping up your retirement savings. Investors are free to withdraw all their money at any time, for whatever reason, with no restrictions or penalties, although doing so would obviously undermine the main benefits of the accounts in that the benefit of compounding growth is sacrificed," he says.
”The benefits include the opportunity to save up to R30 000 a year in TFSAs and up to R500 000 over a lifetime, completely tax-free. This means you pay no tax on the growth of your savings (dividends, capital gains or interest), nor on any withdrawals.”
He points out that TFSAs should not replace pension schemes and retirement annuities (RAs), but complement them.
"Pension and provident funds and RAs have investment a restriction placed on them that stop them from, for example, investing 100% in equities, despite the stock market’s track record of delivering the best returns over longer terms but still allows for a well-balanced composition of asset classes for the underlying investment fund offering the potential of inflation beating returns.
"TFSAs have no such restrictions and can be totally invested in equities should one require little or no underlying investment protection against market volatility. So the financially sensible consideration is to take full advantage of your retirement savings allowance through your pension funds and RAs, and thereafter make use of TFSAs to boost your savings in accumulating capital,” he says.
This article first appeared on fin24.com.