Look to the national budget and make Tax-free Investments or Savings Accounts a part of your financial planning
With just hours to go before this year’s national budget speech, we can advise that all South Africans need to begin saving, no matter what the Finance Minister presents. All that’s needed is personal determination to develop a savings discipline. Add the opportunities offered by a tax-free investment account (TFIA), also known as a tax-free savings account (TFSA), and the results could be very rewarding.
According to Errol Meyer, Head of Advisory Financial Consulting at Standard Bank, the Treasury has come to the aid of South Africans who see taxes and inflation eroding the value of their non-retirement savings by offering an additional option. Tax-free accounts can be used for long-term goals, but most ideally for short-term goals, such as future holidays and education. They are valuable additions to retirement annuities, which cater for long-term savings, and South Africans should consider them as part of their personal financial planning efforts.
Presently, tax-free accounts offer an opportunity to save up to R30 000 a year tax free, with a lifetime limit of R500 000 per person – though this could change with the budget announcements. The key to the success of tax-free accounts is that they are flexible: you can begin saving with as little as R150 – R250 a month, and various financial institutions structure their TFIA accounts to offer investments in a wide variety of asset classes from equities, unit trusts and bonds to listed property funds and cash.
Even though the financial year for taxpayers is approaching rapidly, any investment made before 28 February will qualify for tax-free status. The advantages offered by tax-free accounts include:
No tax on interest earned
The accounts offer a tax-free haven for deposits from other accounts that would attract tax
Withdrawals are tax-free to the lifetime limit of R500 000
Money may be withdrawn at any time and moved from one tax-free account to another
Significant opportunities for young South Africans to save
An investment alternative for parents who can pay the R30 000 annual limit into an account for a child.
As with most savings, the longer cash stays in the account, the quicker it grows. The objective should be to not make withdrawals from these accounts for between three and five years to let benefits grow. Where possible, the amount deposited each year should be adjusted subject to the limits to take care of inflation, so returns are not lessened by changing financial circumstances.
Whether the Minister announces a rise in the deposit maximum for tax free accounts this year or not, this is an opportunity to save for the future that should not be ignored by any South Africans, young or old, no matter the tax bracket they fall in.