Tax-free savings a reality

2015-02-22 15:00

From next month, South Africans will be allowed to invest up to R30?000 a year in tax-free savings accounts (TFSAs).

On Friday, National Treasury announced the final details in relation to TFSAs, and it is expected that many product houses will be announcing their tax-free savings accounts over the next few weeks.

TFSAs are aimed at increasing South Africa’s savings rate through tax incentives. Any amounts invested in these accounts will not attract any form of tax.

Rowan Burger, an executive at Momentum, says the tax-free benefit will significantly improve investment returns for individuals.

For example, if a 25-year-old invested R30?000 each year in an interest-bearing bank account, by the age of 65 they would have just more than R1.5?million after tax.

In comparison, a tax-free savings account with the same interest rate would be worth R2.7?million, because no tax is payable.

Parents can also open TFSAs for their children. A family of four can in effect save up to R120?000 a year in tax-free savings. This makes TFSAs an ideal savings vehicle for education.

TFSAs can be issued by banks, long-term insurers, managers responsible for collective investment schemes (unit trusts and exchange traded funds), government (through the retail savings bond scheme), mutual banks and cooperative banks.

For a product to qualify as a TFSA, it has to be simple to understand, adequately transparent and suitable for investors. According to Treasury, the following products will be eligible as TFSAs: most savings accounts with banks; fixed deposits; unit trusts (collective investment schemes); retail savings bonds; certain endowment policies issued by long-term insurers; linked investment products; and exchange-traded funds that are classified as collective investment schemes.

Performance fees will not be allowable for TFSAs and savings products that can be used as transactional accounts are not allowed.

Contributions to all tax-free savings accounts will be limited to R30?000 a year and R500?000 over the life of an individual. However, Treasury has confirmed that, over time, the balance in these accounts may exceed the R500?000 limit because of accumulated earnings and capital gains.

To promote saving, Treasury is not allowing the conversion of existing savings accounts into TFSAs. Treasury is investigating the possibility of allowing low-income individuals who are invested in a product that is not suitable for their needs – such as endowment policies with a tax rate of 30% – the option to convert their savings or investments in current products into tax-free investments, as long as their value does not exceed the annual limit. This, however, will only be finalised later this year.

All savings and investment products that have a term of maturity, such as a fixed deposit, must be accessible within 32 business days from the time the money is requested.

In the case of other products, it must be paid out within seven business days. Treasury has allowed for an administrative penalty of a maximum of R300 for early withdrawal of fixed-term investments. You will, however, be able to transfer funds from an existing TFSA to another TFSA from March 1.

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