Tax-free savings at every life stage

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Karin Muller, head of growth-market solutions at Sanlam Personal Finance, says deciding which tax-free savings accounts are suitable for you will depend on your individual circumstances. Neesa Moodley shows you how you can use tax-free savings accounts to your best advantage at different stages in your life

Note that one of the key features of a tax-free savings account is accessibility in terms of being able to access your money in an emergency. However, you will derive greater benefit from compound interest and the savings if you use such vehicles for medium- to long-term savings and have a separate emergency savings fund. The tax-free savings accounts available to you include:

.?The Nedbank tax-free savings account

Minimum deposit: R50 a month or lump sum deposits up to a maximum of R30?000 a year.

.?The Nedbank tax-free investment account

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

.?Satrix products

All Satrix products, both unit trusts and exchange-traded funds, 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 exchange-traded funds.

.?FNB tax-free cash-deposit account

Minimum deposit: R1?000.

.?FNB tax-free shares account

Minimum deposit: R300 debit order or R1?000 lump sum.

.?Standard Bank tax-free call deposit account

Minimum deposit: R250.

.?Old Mutual tax-free plan

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

.?Stanlib tax-free savings account

Minimum deposit: R500 debit order, maximum debit order of R2?500 a month or a minimum lump sum of R5?000.

.?Momentum flexible tax-free option

Minimum deposit: R1?000 a month or R15?000 lump-sum deposit.

.?PSG wealth tax-free investment plan

Minimum deposit: R500 a month or R6?000 lump sum.

.?etfSA investment accounts

You can invest in a low- or high-risk investment portfolio, depending on your risk appetite.

.?Alexander Forbes tax-free savings account

You can invest in a low-, medium- or high-risk portfolio.

.?22seven tax-free savings account

Minimum deposit: R350 once off or monthly. The underlying investment fund is either the Old Mutual Core Diversified Fund or the Old Mutual Top 40.

TWENTIES

The main advantage of tax-free savings accounts is that no dividend, capital gains or income tax is payable, so your money will grow faster than in a regular savings account.

“It depends on how long you stay invested – the longer you invest, the more benefit you will get. Although the tax benefits will be low in the beginning, they will grow over time due to the power of compound interest. Investing in a tax-free savings account in your twenties is therefore an excellent idea because you have many years ahead for your savings to grow,” says Muller.

Tax-free savings accounts also have the advantage of liquidity – you can withdraw funds at any time. Muller says many young people may not be ready for savings vehicles that require a long-term commitment.

“However, you shouldn’t treat a tax-free savings account as if it is a short-term savings vehicle because you will lose the benefit of the long-term, tax-free investment return. Also, it is important to remember that if you withdraw funds and later decide to replace this money again, it will count towards your annual threshold amount of R30?000, and your lifetime limit of R500?000.”

THIRTIES

During this life stage, people generally have increased responsibilities and more specific savings plans, such as their children’s education.

“If you think you won’t exceed your lifetime limit, then by all means use a tax-free savings account as an education fund. But don’t use it as an emergency fund – for this purpose, a money market fund, where you will not ‘lose out’ if you withdraw funds, is a better option. However, you could use a tax-free savings account for extra financial support – for example for a life event that may be unlikely but could have a huge financial impact, such as retrenchment. Again, keep in mind that a tax-free savings account is a long-term investment vehicle, not a quick fix.”

FORTIES

You need to start saving for retirement as soon as possible. When you reach your forties, your retirement is getting closer, so you need to start thinking about balancing your tax-free savings account with your retirement investments.

Although both retirement annuities and tax-free savings accounts earn tax-free investment returns, retirement annuities defer income tax to the post-retirement phase, whereas with tax-free savings accounts, income tax is paid before every contribution is made (since you make the payments with after-tax money).

“For most people, a tax-free savings account is not the best retirement-savings option. In this case, retirement annuities are the most appropriate vehicle.

“Although both types of savings offer tax-free returns, it is not just a case of looking at the figures – there are a number of other factors to consider when deciding between which savings product to use, such as protection from creditors, estate duty, liquidity and asset allocation. When saving for retirement, retirement annuities remain tops,” Muller says.

FIFTIES AND BEYOND

Given that the tax benefits of tax-free savings accounts are incurred over the long term, it will be difficult for older people to obtain the same benefits that they could enjoy from other investments, taking into account interest exemption after the age of 65.

“At this life stage, you should think carefully about whether to invest in a tax-free savings account or an asset that provides an income where you can offset the interest exemption. An ordinary unit trust may be a better option. An exception might be if you are 51 and want to invest to leave your children an estate 20 or more years down the line.”

Muller says the most important factors to consider at all life stages are the time frames available for investment and the purpose of your savings. “It is crucial that investment in tax-free savings accounts forms part of a holistic, well-considered financial plan drawn up with the assistance of a professional financial adviser. It must take into account all your financial needs, both short and long term.”

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