How to use tax-free savings accounts to save more
With the range of investment options available today, the choice of products investment products is overwhelming. Perhaps this is one reason that when it comes to household savings, South Africa does not fare well compared to global standards.
Barrie van Zyl, senior manager at Alexander Forbes, notes that South Africa’s national average savings rate is a dismal 3%, while the household debt to income ratio is a staggering 74.4%. He unpacks how to use Tax Free Savings Accounts and Retirement Annuities to assist in achieving a better savings rate.
He said that consumers make debt for purchases and expenses, leaving little room for savings. “The majority of the population do not have any savings to tap into in case of an emergency, and instant gratification purchases are preferred over long term savings and investment commitments,” Van Zyl said.
“More frightening is the fact that nine out of 10 South Africans will not be able to afford to retire comfortably – or at all,” he said.
The culture of saving is one which is still growing in South Africa, and many people do not understand the benefit of compound interest.
“This is where investment vehicles like the Tax Free Savings Account (TFSA) and Retirement Annuities (RA) can benefit consumers. Although they are two completely different products, both can add tremendous value to your financial wellbeing. These products are easy to start and have significant tax advantages and wealth accumulation benefits.”
Van Zyl said both products provided investors with essential income and lump sum benefits at retirement. “The TFSA can also be used over the lifetime of the investment to provide savings benefits for emergencies, house deposits, school fees or even holidays. It is a flexible and affordable investment that makes saving for a child’s education or car deposit really easy.
“You can start from as little as R200 per month (capped at R33 000 per annum), and can contribute R500 000 to the investment over the lifetime of the product. The fees are minimal, you can pay via debit order or lump sum, you have immediate access to your capital and there are no penalties when withdrawing.”
The best benefit of a TFSA according to Van Zyl, is that no tax is levied on the investment. “This means you do not pay interest on the growth and there is no income tax, capital gains tax or dividend tax. Because of the tax advantage and the low fee structure, you have more money available to grow over time, and the longer you leave it the more you will benefit.”
The Retirement Annuity is a longer term investment. “The ultimate purpose of an RA is to provide income at retirement, however it has other advantages as well.”
Although you cannot access the money prior to the age of 55, you may withdraw all available capital on formal emigration, subject to tax. “At retirement, you will be able to access at least one third of the capital in cash, also with tax considerations, which can be used to pay off debt, provide additional income or buy a new car,” Van Zyl said.
An RA cannot be ceded as security for debts, and you may not transfer the policy to another owner, which safeguards your investment. You can nominate beneficiaries on the policy, which will assist the trustees in appropriately allocating the investment on your death, said Alexander Forbes.
The minimum investment amount is R250 per month, and you will be able to invest a maximum of 27.5% of your gross remuneration to the fund for income tax deduction purposes.
“There are various fee structures to choose from and new age RA’s are much more flexible in terms of premium holidays and payment structures.”
Van Zyl believes a combination of these two investments would add value to one’s financial position. “Both products allow you to structure the portfolios in such a way that it suits your risk profile and personal circumstances.”
Read: This is how you can make the most of your savings for retirement
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