By Patrick Sheehy, 26 May 2015
The benefits are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn. There are a number of options available, depending on the level of risk the client wishes to take.
Tax-free savings products give all income groups the opportunity to realise tax-free growth. Returns will vary – depending on the product selected – but investors will see a higher tax-saving the longer they are invested. It’s important to note that government has not taken anything away from investors – the tax exemptions on interest income of up to R34 500 and local dividend income of R30 000 still apply on other discretionary savings.
Affluent clients should embrace the opportunity to invest in these products. Personal taxes have just increased and we’re likely to see more increases in future in other taxes as well. Not to mention increasing electricity costs and the like. Offering tax-free savings accounts to your more affluent clients will shelter them from the effects of any future tax changes to their portfolio.
The reality is that R500 000 over a lifetime – for most South Africans – remains a lot of money. Parents can also open tax-free savings accounts for their children, i.e. a family of four, with two children, can save up to R120 000 a year, tax free.
Having taken the decision to invest, the investor and his adviser need to look at the different vehicles available and decide which one is best for the client’s circumstances. Tax-free savings accounts should automatically form part of this financial planning process. In the case of the more affluent investor, the adviser would need to view this decision in the context of the client’s other investments.
If a client is currently investing, for example, R5 000 a month into a discretionary savings plan and does not have the means to make additional savings, it will make financial sense to split the investment, i.e. invest R2 500 into the discretionary savings plan and R2 500 into a tax-free savings account.
For the higher income tax payers, the saving in tax over the 16 year period (the length of time it will take to reach the R500 000 lifetime limit), could potentially equate to 40% of the contributions made.
These investments also offer flexibility of choice, and we expect more funds and products to become available as tax-free savings vehicles in future. Regulation 28 restrictions do not apply, which means the younger investor can invest more aggressively over the long term.
Weighing up contributions into a retirement annuity versus a tax-free savings account is a slightly more complex decision. The adviser would need to look at the advantages and disadvantages from a tax perspective. The RA offers the benefit of tax-deductible contributions and a tax-free lump sum on withdrawal (up to certain limits). It also provides a form of disciplined, forced saving – for those who need that – because the funds can only be accessed from age 55 upwards.
Tax-free savings accounts can complement, but not replace, retirement savings.
The earlier the client starts to invest in a tax-free savings vehicle, the more he/she stands to gain in tax savings over time. Advisers are encouraged, from an advice point of view, to include these vehicles in the options presented to a client and to point out the tax advantages