Alexander Forbes’ Q&A on Tax-Free Savings Accounts
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The tax free savings account – how will they affect you?
Much of the reform being proposed by National Treasury will affect the income that people
receive in retirement. In addition, Treasury has set out plans for the implementation of tax
free savings accounts with the intention of promoting pre-retirement savings. Here’s a roundup
of some of the main features of these savings accounts and why it’s a good idea for you
to invest in one.
What are tax free savings accounts?
A tax free savings account is an investment product that will allow South Africans to make
contributions to a savings account from their post-tax salary. Contributions will be limited to
R30 000 per year and a lifetime limit of R500 000 – meaning that no person may ever
contribute more than R500 000 to such an account. But the kicker is that all returns earned
on those invested contributions will be tax-free.
Some of the finer details of this account include:
· Individuals can purchase the product from a number of different financial services
providers, including banks, and they can select a product that has assets which are
most suitable for their risk and investment profile
· Individuals will be allowed to change providers and can withdraw funds at any
point to place the money with another company, possibly subject to a small
withdrawal fees
· Individuals can withdraw money from the account at any time. However, this will
reduce the lifetime limit of the account. For example, if a person currently has R100
000 in the fund and they decide to make a first withdrawal of R50 000 they will now
only ever be able to contribute a further R400 000 to the account
· Individuals can hold up to two different accounts, possibly from different providers
at a time, however the total of the contributions made to both accounts cannot
exceed R30 000 per year and R500 000 over their lifetime.
Exemptions and deductions on savings already exist to some degree: individuals under the
age of 65 are currently allowed R23 800 in interest income tax free per year and a capital
gains exemption of R30 000. This income exemption limit will no longer be increased in line
with inflation, which should encourage investors to move over to tax free savings accounts.
Tax free savings accounts will therefore benefit investors who contribute over a number of
years and end up with gains in excess of these current exemptions.
Why are such accounts being introduced?
As mentioned previously, Treasury has proposed compulsory preservation of retirement fund
contributions. However, in many instances retirement savings represents the largest and
most liquid asset pool for South Africans. It is, at present, easily accessible and often
required when people are retrenched or simply between jobs. There have even been cases
where people in financial distress have resigned to access their retirement savings.
These tax preferred savings vehicles have hence been introduced to encourage individuals
to save for short and medium term needs without relying on retirement savings.
How does this savings account differ from a normal retirement fund or retirement
annuity?
Many people will struggle to see the value in having accounts like this when they can save in
their retirement fund out of their pre-tax earnings, but the fact that these savings accounts
are funded from post-tax income and are then tax exempt can often lead to a bigger gain
depending on the return that is earned.
Also, these accounts are intended to fund more immediate needs than your expenses in
retirement. Some accounts and their accompanying asset mix may be structured around a
particular goal, like accumulating enough money to fund twelve years of school for your child
and an additional four years for university.
Furthermore, this money will be available to an individual at any time, not just at retirement
or, at present, when changing jobs. And while contributions to a retirement fund are
unlimited, contributions to a tax free savings account are capped, as described above.
Why you need a tax free savings account
If you are already making discretionary savings out of post-tax income, re-directing those
savings into these accounts just makes sense. There will not be any tax on the interest that
is earned on the investments held or any capital gain. This can give savings a big boost in
the long run.
The principle aims of the tax free savings account are to provide products that are simple in
terms of you being able to identify the underlying assets and how to determine the returns
from the product, transparent in terms of fees and investments, and suitable for your
particular investor profile and goals. The ultimate intention is to give you a savings product
that raises the after-tax rate of return on accessible savings, whilst providing a high level of
security for investors.
Tax free savings accounts will be introduced from March 2015 onwards. For more
information about these accounts you can download the National Treasury paper: Nonretirement
savings: Tax free savings accounts..
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