South Africans missing out on tax-free savings tool - survey

Cape Town – Most South Africans are missing out on a tax-free savings tool that could bring massive rewards in the future.

This is according to a Sanlam survey, which found that many South Africans are uncertain about how tax benefits associated with tax-free savings accounts (TFSAs) actually work.

“They think it might be difficult so they don’t even try to find out,” Karin Muller, head of Sanlam growth market solutions, told Fin24. “The concept is not real and tangible enough to many.”

The survey found that 37% of people interviewed had not heard of TFSAs at all, while another 51% of them were aware of this savings vehicle but had not yet invested in it. Only 12% of the 402 people who qualified in the survey parameters had TFSAs.

There is a clear need for education on TFSA accounts as misconceptions regarding them are common among consumers, the survey results showed.

“One of the things we have to get right is to get people to experience financial moments as assets and not expenses,” said Muller.

Muller said there are many misconceptions about TFSAs. “The moment you call something an account it has certain connotations,” she said. “The real benefit of not paying tax on this investment is only experienced over the long term.”

She said the following three benefits make TFSAs truly attractive:

1. You do not pay tax on your investment returns.

2. It is a very simple savings tool.

3. You have easy access to the money without penalties.

However, she said some of the benefits clashed with each other. “By making it easy to access to your money, people lose out on the compounding effect on an investment by accessing that money.

“The fact that you don’t pay tax means that your full investment return gets reinvested,” she said. “No return is eroded because of tax and you therefore benefit from the compound interest effect.

“People hear about tax-free savings accounts but they still don’t have all the facts straight,” she said.

For example, some people think they have to put R30 000 into an account, when in fact this is simply the maximum amount people can invest per year.

“People still do not get it,” she said. “Clearly, even half of South Africans who are interested in saving are not aware of tax-free savings.”

Although claimed understanding of these accounts is high for all consumers, Sanlam explains in its results presentation, it is clear from the misconceptions that there is a great gap between their perceived understanding and an actual understanding of how tax-free saving works.

“There is a clear need for education on TFSA accounts, as misconceptions regarding TFSAs are common among consumers.

“This becomes clear when looking at the truth and myth test, as very few consumers were able to pass the test with flying colours.

“The main misconceptions consumers have regarding TFSAs include the perception that:

• You can only have one tax-free savings account;

• Your money can only be withdrawn after a certain amount of time (six months) has passed; and

• You can deduct the amount you invest in a tax-free savings account from tax.

 “This emphasises the need for information and education on TFSAs and on how to save and better manage their money.”

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