Calls to change R500,000 tax-free limit in South Africa
Old Mutual has called on Finance Minister Enoch Godongwana to increase the contribution cap for tax-free savings investment accounts to at least R600,000, and bump the annual limit to R40,000.
Introduced in March 2015, tax-free investment accounts allow South Africans to save a maximum of R36,000 per year, with all interest, capital gains, and dividends not being taxed.
The aim of the tax-free accounts was to encourage South Africans to save, given the nation’s chronically weak savings culture.
Old Mutual believes it is time to increase the limits to reflect economic realities and improve long-term financial and retirement outcomes.
The annual contribution limits have been adjusted over time, increasing from R30,000 per year to R33,000 in 2019 and R36,000 in 2021.
The lifetime contribution cap, however, has remained unchanged at R500,000 since inception. At current limits, an investor would reach the maximum contribution limit in approximately 14 years.
Lizl Budhram, Head of Advice at Old Mutual Personal Finance, said that tax-free investment accounts can play an essential role in helping individuals strengthen their retirement outcomes.
However, the R500,000 lifetime restriction limits the long-term usefulness of these accounts as complementary retirement savings vehicles.
“Tax-free investment accounts were introduced with the right intent, but more than ten years on, the contribution limits need to better reflect the foundational objective behind their introduction,” said Budhram.
“When used alongside retirement funds and preservation vehicles, these accounts allow investors to build tax-efficient savings that can supplement retirement income and provide flexibility later in life”.
Calls for R40,000
With Godongwana revealing the National Budget next week, Budhram has asked the Finance Minister to increase the annual contribution limit to R40,000 and the lifetime limit to R600,000.
“An increase to R40,000 a year, which works out to just over R3,300 a month, would remain disciplined and accessible for many savers while significantly enhancing the long-term value of the tax-free benefit.”
“Increasing the lifetime limit to R600,000 would also extend the investment horizon, allowing investors to benefit from tax-free growth for longer,” she says.
She said that increasing the limits would reinforce the original intent of tax-free investments and give South Africans a more realistic opportunity to build wealth without the long-term erosion of tax.
While Budhram has called for higher investment allowances, investors do need to be careful in how they use the accounts.
Exceeding the annual limit can be costly, with any excess contributions subject to a 40% penalty tax on the excess.
Notably, although the investment returns may cause the value of a tax-free investment account to exceed the annual or lifetime limits, this growth does not count as a contribution.
Issues can arise when investors withdraw returns and then reinvest those amounts into a tax-free investment account, as this is seen as a new contribution.
“The tax-free benefit applies to the growth within the account, not to repeatedly withdrawing and reinvesting funds,” said Budhram
“Investors need to be careful when moving money in and out, as any amounts withdrawn cannot simply be replaced.”
Moreover, the annual contribution limit applies in aggregate across all accounts, meaning the current R36,000 yearly limit would be applied no matter how many accounts you have.
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