Where to invest your tax-free savings

2015-03-08 15:00

It’s important to take a balanced view of all available tax incentives when it comes to savings, writes Maya Fisher-French

South Africans are now able to invest up to R30?000 a year in tax-free savings accounts.

Any amounts invested in these accounts will not attract any form of tax, including interest income tax, capital gains tax and dividend tax.

The aim of these savings accounts is to encourage South Africans to save for medium-term goals and emergency funding, thus reducing our reliance on debt and our penchant to access our retirement funds.

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

Tax-free savings vs a retirement fund

Johan Gouws, the head of investments at Momentum employee benefits, says one needs to take a holistic view of all available tax incentives.

For instance, withdrawals from tax-free savings accounts are nontaxable, but contributions made to these accounts are from post-tax earnings. Therefore, though you do not get a tax deduction from your salary, you will not have to pay tax or be subjected to other limitations when you withdraw funds.

In comparison, contributions to retirement funds are tax-deductible, but withdrawals are taxable. Depending on your tax rate, products such as retirement annuities and employer retirement funds may still offer more tax-efficient retirement savings.

Derick Ferreira, the head of product management at Old Mutual, says investors with lower tax rates who are not required to submit tax returns may not benefit from the tax deductibility of retirement annuity contributions and should consider a tax-free savings account.

Investors also need to weigh up flexibility and liquidity over tax benefits. If investors are not contributing to a retirement annuity due to the inability to access such funds before retirement, then they should at least be “considering a tax-free savings account”.

It is also important to note that tax-free savings accounts are limited to R30?000 a year, whereas currently you can contribute up to 15% of your salary into a retirement fund.

Someone earning R300?000 a year will be able to contribute R45?000 a year to their retirement fund, tax free.

Gouws adds that the tax benefits of tax-free savings accounts will only be felt if the investment is held for a longer period of time. “It takes a while for the magic of compound interest to set in. The longer investors can avoid withdrawals, the more tax-free interest will accumulate. Tax-free savings accounts are exempt from capital gains tax, giving them an added boost because these amounts saved also benefit from compound interest.”

What you need to know

.?Tax-free savings accounts are extremely liquid, allowing investors to access funds with seven days’ notice. However, government penalises unnecessary withdrawals by prohibiting investors from reinvesting these amounts into the savings account.

.?Any contributions in excess of the R30?000-a-year limit will be taxed at 40%. Treasury has stated that product providers must disclose these contribution limits and the consequences of breaching them when they market their products, but it remains the responsibility of the investor to ensure that he or she adheres to the annual limit.

.?To promote a culture of saving, Treasury is not allowing the conversion of existing savings accounts into tax-free savings. However, where a low-income individual is invested in a product not suitable for his or her needs – such as endowment policies with a tax rate of 30% – Treasury is investigating the possibility of allowing such individuals to convert savings or investments in current products into tax-free savings, as long as their value does not exceed the annual limit of R30?000.

This will, however, only be finalised later this year.

SHORT TO MEDIUM TERM

Nedbank

MINIMUM DEPOSIT R50 a month or lump sum deposits up to a maximum of R30?000 a year

ACCESSIBILITY You can access your funds within 24 hours

INTEREST Earn interest of up to 5.25% a year

FEATURES You can opt to earn compound interest or have the interest you earn paid into an existing bank account. There are no fees, commissions or penalties on this product

FNB tax-free cash deposit account

MINIMUM DEPOSIT R1?000

ACCESSIBILITY Within 32 days

INTEREST 5.25% a year if your savings are more than R20?000. Lower rates apply for lower savings amounts

FNB tax-free shares account

MINIMUM DEPOSIT R300 debit order or R1?000 lump sum

ACCESSIBILITY Within 24 to 48 hours

FEES 0.4% (plus VAT) a year

Standard Bank

MINIMUM DEPOSIT R250

ACCESSIBILITY Immediately available

INTEREST You earn interest on a tiered scale, starting at an effective 5.01% for amounts of R250 to R5?000 and going up to an effective 5.48% for amounts between R20?000 and R30?000

FEES Note that although you are not charged fees for deposits, you will be charged each time you make a withdrawal

Investec tax-free fixed deposit

This is a 12-month fixed deposit

MINIMUM DEPOSIT R30?000

INTEREST Fixed interest rate of 7.31%

FEES There are no fees. However, if you withdraw the funds before the money has been in the account for 12 months, a penalty – up to R300 – may apply

LONGER-TERM INVESTMENTS

The Nedbank tax-free investment account

Minimum deposit R500 a month or a lump sum deposit of R10?000

Accessibility Within 24 to 48 hours

Growth More suited for a long-term savings goal

Features You can choose from a number of underlying unit trust fund investments. Although each fund will have administration fees, there are no performance fees. There are no exit penalties or early termination fees

Satrix products

All Satrix products, both unit trusts and exchange-traded funds (ETFs), are available as tax-free savings vehicles

MINIMUM INVESTMENT

.?R500 debit order or R10?000 lump sum on unit trusts

.?R300 debit order or R1?000 lump sum on ETFs

ACCESSIBILITY Within 24 to 48 hours

FEES Satrix flagship fund fees, excluding VAT:

.?Satrix 40 – 0.45%;

.?Satrix Balanced – 0.6%;

.?Satrix Low Equity – 0.6%;

.?Satrix MSCI World – 0.5%;

.?The other unit trusts’ fees are 0.45%, except for Rafi, which has a fee of 0.6%; and

.?Fees on all ETFs are 0.4%, except for Rafi, which is 0.46%

FNB tax-free shares account

MINIMUM DEPOSIT R300 debit order or R1?000 lump sum

ACCESSIBILITY Within 24 to 48 hours

FEES 0.4% (plus VAT) a year

Old Mutual tax-free plan

MINIMUM DEPOSIT R350 a month or a R5?000 lump sum. You can invest according to your requirements. For example, R1?050 each quarter, R2?100 twice a year or R4?200 a year

FEES A minimum of R20 a month or 0.75% a year. This fee reduces to 0.5% a year if you choose underlying funds from the Old Mutual stable rather than Coronation, Prudential, Investec or Nedgroup Investments. If you invest the full R30?000 a year, your fees reduce to 0.25% if you have invested in Old Mutual funds and 0.5% if you have invested in other underlying funds. You will also be charged asset management fees. If you invest via a broker or financial adviser, you will have to pay advice fees

MINIMUM DEPOSIT R500 debit order or maximum debit order of R2?500 a month or a minimum lump sum of R5?000

Accessibility You can access your money within 24 hours

FEES There are no performance fees, but if you use a financial adviser, you can be charged an initial advice fee. The underlying fund will carry an annual service fee, which may include a trail fee to your financial adviser

Stanlib tax-free savings account

MINIMUM DEPOSIT R500 debit order or maximum debit order of R2?500 a month or a minimum lump sum of R5?000

ACCESSIBILITY Within 24 hours

FEES There are no performance fees, but if you use a financial adviser, you can be charged an initial advice fee. The underlying fund will carry an annual service fee, which may include a trail fee to your financial adviser

Alexander Forbes tax-free savings account

This is a savings account that can be structured to suit your savings goals

Fees The three investment options carry fees as follows:

.?High risk/high return – 1% a year;

.?Medium risk/medium return – 1.2% a year; and

.?Low risk/low return – 0.4% a year.

22Seven tax-free savings account

22seven is a free online service, as well as free application available for download, which allows users to see all of their money in one place. The company has brought out a simple, easy-to-access tax-free savings account. The sign-up process is 100% online, can be done on your mobile phone and it takes just minutes to open an account. You can withdraw money any time without being penalised

MINIMUM INVESTMENT R350, once-off or monthly.

FUNDS One can select from Old Mutual Core Diversified or Old Mutual Top 40

FEES 0.68%

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