The benefits of tax-free savings can set you up for life

SA’s savings rate is extremely low by global standards, which prompted the government to introduce a tax-free savings initiative in 2015. 

The benefit of the tax-free savings account (TFSA) is best realised when staying invested for the long term to allow for capital appreciation to take place. The tax-free interest or return earned on the investment over time can be reinvested to get you closer to your savings goal. 

TFSAs introduced to get South Africans to save more

“With savings of less than 15% of GDP in 2019, SA has one of the lowest savings rates in the world and is far below the world average of 25.1%. Statistics show that only 6% of the population would be able to retire comfortably,” says Motlatsi Mkalala, head of main market at Standard Bank. 

The idea of the tax-free savings initiative is to get South Africans into the habit of saving by providing an incentive for them to do so. The benefit is that all proceeds earned from TFSAs — including interest income, capital gains and dividends — are exempt from tax.

Know your contribution limits

Mkalala says you can start saving in a Standard Bank tax-free call account with as little as R250, and contribute up to R36,000 per tax year, while the lifetime limit of the investment is set at R500,000.

There are no restrictions on how many TFSAs you can have, but it is important to remember you will have to manage them carefully — especially if you have different TFSAs with different financial institutions. This is where expert advice and management becomes helpful.   

Parents can also open a TFSA on behalf of their children and can save up for them in the TFSA vehicle, which is seen as separate from theirs and would not eat into their own contribution limits. 

“TFSAs are one of the most tax-efficient ways of securing your child’s future success. With time on your side, the investment stands to benefit from the magic of compound interest — even if it is a small amount each month.”

If you open a tax free investment in your child’s name and contributions reach the R500,000 threshold, when they turn 18 they will have made use of their personal lifetime limit and will not be able to continue their contributions or invest in a new TFSA. However, it is probable the lifetime limit may be increased over time. 

The SA Revenue Service (Sars) imposes tax penalties of up to 40% on any contributions that exceed the annual and lifetime limits. If you have reached your limit with a TFSA but have additional funds you wish to save, consult a financial planner to explore other vehicles for your additional savings to ensure tax efficiency across your investment portfolio.

Beware withdrawals 

You can withdraw money from TFSAs when you like, depending on the type of account, without attracting any costs from the financial institution. However, withdrawals must be considered carefully because once an amount is withdrawn, it is deducted from your lifetime contribution limit.

If you were to save R100,000 in your tax-free savings account, and you withdrew the full amount — your remaining lifetime contribution would be limited to R400,000. Similarly, if you contribute R36,000 for the tax year, and you withdraw R10,000, you will not be able to contribute again during that same tax year. 

“It’s critical to keep in mind the impact withdrawals can have on your ability to take full advantage of the benefits of the TFSA. It’s your money, and you can decide how you wish to use it, but the idea with the tax-free vehicle is to stay invested for the long haul.”

Stay for the long haul

With so few South Africans able to retire comfortably, Mkalala says part of the reason government implemented the tax-free initiative is to encourage people to save for their retirement, though some people may use the vehicle to achieve other life milestones.

“Standard Bank encourages people to adopt a long-term point of view when using the tax-free savings or tax-free investment account. SA needs to move in a direction where people understand the principles of investing, with time being one of them, as well as the type of asset base that makes up the fund you are looking at.” 

Tax-free investment vs savings

Mkalala says the main difference between a tax-free investment (TFI) and savings is the way the accounts, or funds, are structured and the underlying assets they are invested in. A tax-free savings account will let you withdraw your money at any time whereas with a tax-free investment, you will stay invested over a term. That term could be six months, one year or five years.

Not everything is made equal in terms of the asset class you are going to be investing in: some are cash and some have bonds or equities, and that will contribute to the performance of that account or fund. The investment fund will also carry a certain level of risk.

So, how do you choose an underlying asset?

Mkalala says it all depends on your needs and goals. This is where it becomes valuable to consult an experienced, certified financial adviser who will conduct a financial needs analysis to determine your risk appetite. They will be able to craft a financial plan that incorporates appropriate savings and investment vehicles that are aligned and linked to your future and what you wish to achieve. 

Why is it an opportune time to take advantage of a TFSA?

Many of us will delay saving until a time when we have money, but that day will never come. It is never too late or too early to start saving: it’s important to start now and take advantage of vehicles such as the TFSA that help you to bolster your savings. 

“We must start now because if we don’t, we won’t have enough to sustain us over our retirement. And if we don’t have enough, we depend on the social system which will hinder economic growth and prosperity of communities.”

If you haven’t started saving, consider using the TFSA vehicle as a platform to start, for as little as R250 a month. Standard Bank’s tax-free call account allows South Africans to make use of the government’s offer of making tax-free investments of up to R36,000 a year or R500,000 over their lifetime — through investing in exchange traded funds (ETFs) on the JSE. 

The account gives investors access to more than 70 selected ETFs when they invest from R250 in the call account. An ETF is a basket of investments, such as stocks and bonds, that allow you to invest in several securities at once.

The added benefit of investing in a TFI is that you can leverage the returns of your investment earned over time. The returns can be reinvested without using your annual contribution limit, if you don’t make withdrawals.

“Investing in a tax-free investment call account with Standard Bank is a seamless and rewarding experience.” 

This article was paid for by Standard Bank.