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Even though tax-free savings are relatively new in the South African financial planning landscape, introduced by National Treasury in March 2015, it is to some extent and indictment on the industry that these savings vehicles are not yet used effectively in client portfolios.
Still too often, these investment vehicles are used as sales tools, to generate "new business" without appropriate consideration in how an investor's existing portfolio can be restructured to benefit from the tax advantages afforded to tax free savings accounts or investments.
An investor can contribute up to R33 000 per annum or a maximum lifetime limit of R500 000 into a tax-free savings account. The biggest benefit to investors is that the growth and eventual withdrawal or income generation from these investments are tax-free. The investment does not attract any income tax, capital gains tax or dividend withholding tax during the investment or “accumulation” phase.
Further, once the investor needs to start withdrawing an income from the investment, i.e. to supplement retirement income, this is also tax free. If used appropriately, this can be an excellent retirement planning tool, specifically if started early enough, but also for investors approaching retirement or already in retirement.
Starting your tax free savings investment early can make a meaningful difference to your retirement plan, as the below example illustrates, by investing the maximum annual limit (R2 750 per month) over 10 and 15 years into a balanced investment portfolio:
- Estimated value after 10 years: R596 744
- Estimated value after 15 years: R1 250 395
The above values assume a portfolio return of 11% per annum over the respective periods.
Contributions to a tax-free savings plan can be done either by new investments or, alternatively, by annually re-balancing a part of an investor's existing portfolio, to benefit from the tax advantages afforded to tax free savings plans, i.e. an investor can annually transfer R33 000 from existing investments to a tax-free savings plan, i.e. from existing unit trust or savings accounts.
This is important from a financial planning perspective, as the annual interest exemption has been 'frozen' since 2014 at R23 500 for investors below 65 and R34 500 for investors above 65.
In planning for retirement and planning in retirement, it is important to use the available tax exemptions in the most effective manner. This includes: tax free savings, interest exemptions and retirement annuities, which still remain one of the most effective retirement planning tools, given the tax deductibility of premiums and the tax free growth within retirement annuities.
The true value of a tax free savings account is back-end loaded, meaning that it emerges over time. There is no way to circumvent this, so the best thing is for investors to start investing in them sooner rather than later in order to access these benefits (tax-free income and growth) in a meaningful way.
Wynand Gouws, CFP. Wealth Manager, Gradidge Mahura Investments. Views expressed are his own.
