Big change to tax-free savings accounts in South Africa

 ·10 Mar 2018

While there was very little in the 2018 National Budget indicating an impact on long-term savings – positive or negative – a National Treasury regulation that kicked in on 1 March 2018 provides South Africans with added flexibility when it comes to Tax-free Savings Accounts (TFSAs).

This is according to René Grobler, head of cash investments at Investec Bank, who said that as of 1 March 2018, South Africans will be able to switch part of or their entire TFSA’s from one financial service provider to another at no cost – at a maximum of twice a year.

This will enable investors to re-evaluate their tax-free investments and adjust it to their personal circumstances, if required, said Grobler.

“Three years ago on 1 March 2015, the South African Government introduced Tax-free Savings Accounts as an incentive for South Africans to save more,” she said.

“With tax-free investments, investors are allowed to invest up to R33,000 per year with a lifetime limit of R500,000, taking advantage of the medium- to long-term benefits of compounding, without paying any tax on interest, dividends or capital gains tax (CGT).

“The additional tax savings these investments offer can also add up and compound over time growing into a substantial investment,” she said.

Tips to get the most out of your TFSA

To maximise the tax benefits and returns of a TFSA at a bank, investors are encouraged to keep their funds invested for as long as possible to benefit from compound interest over the investment period, Grobler said

This is because notice deposits normally have lower interest rates attached to them than fixed deposits, but allow for greater flexibility in terms of withdrawals, she said.

“You should carefully weigh up what would be most beneficial – a notice deposit or a fixed deposit, for the investment period you have chosen. For example, you could ask your bank to provide you with a preferential rate if you choose a 12 month fixed deposit option.”

Grobler added that before holders of TFSAs choose an investment product (i.e. cash at a bank, unit trust-based or equity based investments) they should consider the following:

  • Investment horizon or investment goal: Are you investing for the long or short term?
  • Risk profile and return requirements: Given the state of the financial markets at a particular time – stable or volatile – are you seeking a capital guarantee or wish to place the funds higher risk/return investments?
  • Who will be the beneficiary or beneficiaries should you want to leave the product as a legacy and not make withdrawals in your lifetime?
  • How important is it to you to access the cash as and when required? Are you prepared to leave the cash within the investment for several years?
  • Tax considerations, in relation to the asset class, such as whether the full interest tax exemption has been utilised.
  • It is recommended that you discuss these considerations with your financial adviser who will be able to assist in selecting the appropriate product and asset class based on your risk profile and the rest of your investment portfolio.

Read: SARS collects R3.3 billion from South Africans with unauthorised overseas assets

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