Investing

We think that its pretty safe to say that South Africans have a long-standing legacy of being big spenders but maybe not the best savers. With a nation that includes the majority barely breaking through the breadline, it’s not an unfamiliar feeling to be left wondering how you’re going to make it through the month.

With extreme levels of consumer debt reaching record heights in 2015, the government took the initiative to introduce a ground-breaking concept – Tax Free Investment Accounts – an incentive to encourage long term household savings.

Since then, financial houses have created quite a buzz about the concept, promoting them at every turn, but what exactly are tax free investment accounts and how do they affect you as the tax payer?

Simply put, a tax free investment account is a type of savings account that allows you to invest your money across a combination of financial products such as unit trusts, fixed deposits, bonds and so forth. The main difference between this and traditional savings accounts is that all your income and returns are completely tax free.

The critical advantage of this type of account is that your growth or earnings are exempt from tax on withdrawal, meaning that you won’t pay any tax when you cash out your investment. You’re also able to reinvest your returns and they don’t count towards your annual or lifetime contribution limit. You’re free to withdraw from your tax savings account at any time you wish, however any replacement investment amount is treated as a new contribution and will therefore count towards your annual and lifetime limits.

So how does it work and are there Limits to Tax Free Savings Investments?

Current regulations allow for an annual contribution limit of R33,000 per tax year, with a lifetime limit of R500,000. Once you have reached your lifetime contribution limit of R500,000 no further investment in tax free savings account will be allowed.

Provided that you don’t invest more than R33,000 in total for the tax year, your investment can be spread across as many accounts as you like. It’s important to remember that the annual limitation can’t be carried over to the next tax year, you simply forfeit any unused amount and are given a new annual limit of R33,000 to invest in the following tax year.

A massive benefit is that if you’re a parent, you’re able to open a tax free savings account for your child(ren), but you need to be aware that any contributions you make to this account on their behalf counts towards their annual and lifetime contribution limit.

Choosing the best investment partner

The benefits and features of tax-free savings accounts in South Africa are pretty much standard, so the important part of choosing the best one for you would be to choose the very best advisors and planners. It is critical that you choose a provider who shares the same goals for your unique investment journey. Some companies are willing to carry greater cost for the sake of better customer experiences and others, will rather take the lower cost and the lower quality customer experience.

At Maysure, we understand that investment is so much more than a game of numbers. It is a personal journey that you and your loved ones are undertaking to cement the future for those most important to you. No two journeys are the same, and no two clients will receive the same advice from us. We listen, we talk, we plan – together. You are more than a client for us, you are an unwritten story that we want to help you write.

We truly believe that knowledge is power, and we want to make sure that you know exactly what your money is doing for you.

It is very important to understand Tax-free saving investments shouldn’t replace other types of investments. Keep your portfolio fluid and focus on all aspects of investing with a suggested priority list from your advisors.

You should never sacrifice your maximum retirement savings or reduce your other financial commitments to invest in tax-free savings accounts. Rather see them as a long term investment opportunity that needs to be nurtured and grown as each financial year passes. Another very important consideration to keep in mind is that Tax free investment contributions are NOT tax deductible like RA contributions are, so this needs to be factored into your discussions with your advisors.

As a human being, you know that you’ll have those days in life that you’ll be faced with unexpected expenses. And you’ll either be wishing you had some savings, or you’ll be thanking yourself for saving in the past.

So where to from here? Tax-free investment accounts are a fantastic long-term investment product. Do not use them for your day-to-day savings, do not use them for your emergency fund, do not replace your retirement annuity and do not go into debt to invest in them. Rather speak to us, let us look at your portfolio and advise you on the best way forward. Once all aspects of your financial planning are in order then let us create a road map for the best way to achieve tax free financial growth on further planned investments.