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South Africa’s National Treasury opened the gates for tax free investing on 1 March 2015. This is possibly the most generous gesture investors have ever received from government as ALL the returns on your money saved, be it interest, dividends or capital gains will be delivered to you free of taxation. It is a shame government hasn’t put more effort behind promoting the really good things they do like this initiative, but industry has recognised the opportunity for investors and is spreading the word. In this special podcast Helena Conradie, CEO of low cost index tracker SATRIX speaks about the ins and outs of these Tax Free Savings Accounts. – Candice Paine
Helena Conradie is the CEO of Satrix. Helena, there’s been a lot of hype around the tax-free savings account, which was launched recently by National Treasury. Why should people be considering the tax-free savings account?
Well, if you think of any cost in your investment, tax plays a huge part in that total cost. If someone tells you that you can get this free (and that they take away the tax component), it is worth the hype, for sure. Just for that one reason alone, I think every one of us should look at this as a very possible investment in your total portfolio.
What is it that’s taxed in a normal investment?
There are three components. 1. The growth of your investment. 2. The income. 3. The dividends. All three of those are tax-exempt in this case.
How does the tax-free savings account work? How much can I invest and who can invest in one of these?
Firstly, everyone can invest and I think it’s important that all of us consider that, and think about this as a very possible long-term investment. In total, you can then invest R500k over your lifetime as well. Think of it as very long-term. Half-a-million Rand that you can invest in total. On an annual basis, the constraint is R30k per month, so you invest a maximum of R30k per year and that equates to 16 years and eight months, precisely, which will take you up to R500k over a lifetime.
Do I have to invest R30k per year?
No. You can invest anything. That’s just the maximum. You can’t invest more than that in a year.
What happens if I do?
You would be taxed. There will be a tax penalty, so it’s not wise at all, to go above that R30k limit.
How many tax-free accounts can I have and where can I invest?
There’s no limit to the number of accounts. The only limit is really, on the Rand demand at R30k per year. You can go to different providers. You can go to different products within one provider as long as you stay within your R30k/year limit.
So I can have three or four, as long as the total is R30k.
Yes, and it will be monitored so each provider needs to send this information to SARS. For that reason, they will pick up if you go over your R30k limit on all the different products in which you invest.
There are penalties?
They will definitely penalise you.
SATRIX has a number of products. How does an investor go about deciding where to invest?
We made it very simple. We don’t have a unique tax-free savings product. We just added that option to all of our products. We have 18 products in total; seven Exchange Traded Funds and 11 Unit Trusts, and you can invest in all those in that tax-free option. Which one? That forms part of your total investment decision as with any other decision, in which product you invest. This is just a portion that is tax-free. If you go to a financial advisor, they can look at your specific circumstances and whether you should perhaps split this R30k over different options. The total number of factors that is always important in a total portfolio…this will apply to this decision as well.
So I could choose one of SATRIX’s more aggressive portfolios and combine it with a conservative one from another provider and build something in between?
Exactly. See this as your total choice being the same. In this case, you just have the benefit of a tax-free portion of your investment as well. That’s why you can’t ignore this. You can’t dismiss this or be sceptical about it. It is a real benefit and it will increase your total return in the end.
Should I be using this tax-free savings account in lieu of my Retirement Annuity?
You can. Definitely. It’s not the same option, so you don’t have to see it as a replacement for a tax-free annuity. Different factors play a role. One is taxed before you actually invest in the product and the other one is taxed after you invest, so just be aware of all those different options. Again, talk to your financial advisor about it but it’s not one replacing the other. You can see it as an addition to the other.
In my Retirement Annuity, I’m locked in there until retirement age. Is that the same with the tax-free savings account?
No. Here you have flexibility. For examples, with any other product where you can redeem within the lifetime of that product at any time, you can do this as well. It’s a benefit, but it’s also a challenge to the investor because now you need to maintain that discipline of keeping this long-term. You’re going to get the biggest benefit out of this if you invest for the long-term. The fact that you can dis invest after a month or a week…don’t do that. It is flexible, though. You can withdraw your money.
If I want to redeem the money because I need it, can I then put it back into my tax-free savings account?
You can, but it will still be the limit of R30k per year. For example, if you’ve added R20k to your total investment and you withdraw R10k of that, you can only top it up with another R10k.
Within a year…
Yes, within a year.
Who can invest in this? Can my children invest in this?
Anyone can invest in this. Anyone who can open an account can invest in this. As we said previously as well, you can invest in three or four accounts. There’s no limit on the number of accounts or the type of individual investor.
Helena, this sounds like a wonderful initiative from National Treasury and one that everybody should be taking advantage of. One of the factors that you’ve spoken about is that it’s for the long-term, so your contributions will be over 16 years and eight months. Does that mean that I could actually start looking at a more aggressive portfolio if I’ve committed to that time-frame?
You can, but the time frame is very important and then, any other risk factor that could play a role in your decision such as your risk profile, whether you have dependants, how old you are, or how close you are to retirement. All those factors are still, very important but yes, you can definitely up the risk of your portfolio if you stay there for the long-term and don’t withdraw in between.
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