Tuesday, 31 March 2015 - 20:00

 

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Seed Weekly - Tax Free Savings

In general, South Africans are not really good at saving. According to tradingeconomics.com personal savings in South Africa averaged R 1.2bn between 1960 and 2014 with a record low of –R 54bn in Q2 of 2014. See graph below:

To encourage South Africans to save more, Treasury announced that from 1 March 2015 all natural persons can save up to R 30 000 per year tax free.

The facts:
• You will be able to make investments into Tax Free savings accounts of R30 000 a year (R2 500 a month) and up to R500 000 over your lifetime.
• This will take approximately 16 years and 8 months to contribute the life time limit.
• For Treasury to ensure that investments are transparent the regulation stated that all fees must be reasonable and free of performance fees.
• There will be a limit for penalties on early withdrawals and no complex structured products are allowed.
• Your investment in this product will enjoy growth free of any tax on interest earned, tax on dividends paid out or any capital gains tax if applicable.
• You may withdraw your money at any time but whatever you withdraw you will not be allowed to be replaced, making it mostly suitable for long time saving.
• Only individuals can open an account, no account will be allowed to be opened for a company or a trust.
• Parents can open an account for their children as long as withdrawals are paid to that child, which makes this an attractive product for parents saving up for a child’s education.
• There are no limits to opening more than one account but a penalty tax of 40% will be implemented on the amount that exceeds the annual or lifetime contribution limit.

My initial thought was that it did not look like such a big saving and I wondered whether it was really ‘worth it’. To see if this held true I decided to do a simple comparison between investing in a discretionary investment (i.e. an investment where you are being taxed) vs the tax free savings account.

If we assume a personal marginal tax rate of 41%, the maximum contribution of R 2 500 per month, and an assumed return of 10% annually, the results are quite significant.

The investment return earned over the full period (16 years and 8 months) (net of tax) would be approximately R 1 495 000, compared to R 2 046 000 if a tax free savings account was used.

This amounts to a massive tax saving of R 551 000, with this difference growing the longer the investment in the tax free savings account is retained.

It can be safe to say that, just based on the above, it does make a lot of sense to make use of the tax free account. Add to it the flexibility of being able to withdraw at anytime – and also the fact that your money can grow faster compared to a regular savings account, I think it would be unwise to not make use of this.

At Seed we pride ourselves as being prudent stewards of wealth and our unit trust funds can now also be accessed via Tax Free Savings Accounts on the Momentum and Glacier platforms. For more information visit our website at www.seedinvestments.co.za or contact the office directly on 021 9144 966.

Have a fantastic Easter!

Renier Hugo

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 31 Mar 2015

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