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Tax-free savings: when should you invest?

Tuesday, 03 March 2015   (0 Comments)
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Changing South Africa’s bad savings culture will be no easy task but examples of other emerging markets who have succeeded in this area provide important lessons.

Government-led initiatives are key, and all the better if industry too becomes a catalyst for change through better financial education and innovation that encourages much-needed prudence. But the bottom line remains: no matter how small, the sooner individuals begin saving, the better. So in order to effect a new generation of savers, how soon should one begin saving?

National Treasury has stipulated that the maximum amount that an individual can invest per annum is R30 000 and the maximum lifetime amount is limited to R500 000 – any amount exceeding this will be taxed at 40%. For an investor who opens a tax-free savings account on 1 March and invests R30 000 each year, it will take them exactly 16 years and 8 months to reach the R500 000 cap. 

Treasury has confirmed that parents can open a tax-free savings account for each of their children so saving could literally start from as soon as an individual has an ID number.  

First mover advantage

While the early adopters among us might be first out of the starting blocks, many others may have a "let’s wait and see" approach but it’s worth considering how much that wait will actually cost you.

Take a 35 year-old individual who starts contributing R30 000 per year into a tax-free savings account, with a 7% fixed interest rate. By the age of 52, that individual will have reached the lifetime contribution of R500 000 as per the current legislation and accumulated R915 270.52. Assuming this is left in the tax-free savings account until retirement at 65 years of age, a total of R2 359 891 will be available, tax free. 

If however, this individual starts contributing just one year later, at age 36, by the time retirement age is reached, the tax-free savings account would have accumulated a balance of R2 205 505.85, which is R154 385 less than if contributions started only one year before.

So what is the catalyst for change?

In a bold move for the institution named Best Private Bank and Wealth Manager in South Africa for the last two years at the Annual Global Private Banking Awards by Private Wealth Management (PWM) and The Banker Magazines (part of the Financial Times Group), Investec is committed to playing its part in Treasury’s plans for a more savings-conscious South Africa.

Investec Cash Investments, a division of the Specialist Bank, is launching a tax-free savings account and to qualify, clients will need just R30 000 to invest. This is down from the R100 000 minimum investment traditionally required. 

Available from 1 March 2015 – the launch date for tax-free savings accounts as stipulated by National Treasury – the Investec Tax Free Fixed Deposit offers a 12 month fixed deposit of R30 000 at a compelling interest rate of 7.31% with no fees and 100% capital guaranteed.

"March 1st marks a truly exciting opportunity for the banking sector to support National Treasury’s drive to improve household savings for all South Africans. We’ve reduced the Investec Cash Investments minimum investment amount significantly, in order to encourage more people to take advantage of what we believe to be a compelling product," says René Grobler, Head of Investec Cash Investments.  

She adds: "We anticipate that our Private Banking clients will be enthusiastic about the new tax-free savings account and also, that it will attract a raft of new clients who can now benefit from the Investec experience".

The Investec Tax Free Fixed Deposit is available to individuals only and the fixed rate is set at the date of investment. Investors will be able to redeem or roll the investment at the end of each 12 month period however, if access is required to these funds in the case of an emergency, early withdrawals will be made available within seven days of the request, subject to a penalty of R300.

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