Candice Paine, of PR Financial Services, explains the benefits of tax-free investments. ‘The longer you save, the bigger the tax saving’, says Paine. An individual can contribute a yearly amount of R36,000 – up to a lifetime maximum of R500,000. ‘As the money grows, all the returns on that investment are tax-free’. – Jarryd Neves
Candice Paine on tax-free savings:
Tax-free savings are open to everybody – even minors. The big benefit of it is that the longer you save, the bigger the tax saving in your tax-free account. What the government did – national treasury – I think it’s about six years ago now, started tax-free savings where you could contribute an annual amount. Currently, that annual amount is R36,000 up to a lifetime maximum of R500,000.
As that money grows, all the returns on that investment are tax-free. I’m not sure everyone is aware, but we are taxed on the returns on our investment. So you’re taxed on a capital gains. That’s basically when your share price goes up, you’re taxed on the interest income that you earn and you’re taxed on dividends that the shares pay out.
In your tax-free savings account, none of those taxes are applicable to the underlying investment. So the key is to stay in the investment as long as you can, have the benefit of the compounding and obviously no tax.
On investment caps:
Those caps are just on the money that you put into the investment. So if you contribute your R36,000 per year up to your lifetime cap of R500,000, it’ll probably take you about 15 years to reach that cap. But the returns – 15 years of compounded growth – is what you’re really after. What I say to clients is you need to view your tax-free savings account as a long-term investment, because it’s only after you’ve put in quite a considerable amount of money into the tax-free savings account, that you start getting the benefit of the tax-free returns.
For example, the first R40,000 of a capital gain is tax-free. So your investment has to grow quite substantially for you to have made R40,000 and only thereafter, are the returns tax-free. You need to view it as a long-term saving and just by rote every year – if you can – put in your R36,000 and let the investment grow.
On growth vs allocation:
They’re completely different. The growth is the tax-free bit and the actual money that you put in is the R36,000. Whatever growth you get is just par for the course and that’s what compounds. But it’s your contribution or your premium that is capped at R36,000 per year up to this lifetime maximum. The growth is just the growth. It just keeps getting reinvested into your tax-free account.
On setting up a tax-free savings account:
I would advise everybody who can find R36,000 or who can set up a debit order for R3,000 a month to do it. The benefit comes in the longer term. This is where investor behaviour becomes really important – that you actually stick to this way beyond the 10-year mark. Because that’s when the compounding kicks in of your underlying investment and that’s where the tax-free bit comes in.
It also brings into the conversation, what do you invest in? What is the underlying investment? Many people understand there is a tax-free savings account. They understand the R36,000 – but they don’t really maximize on where you can invest. You can actually invest anywhere, in any of South Africa’s unit trusts. The rand denominated ones as well, the random nominated offshore funds.
There’s a lot of conversation in the media about investing offshore, and your tax-free savings account can be invested 100% offshore in rand denominated offshore funds. A lot of people tend to get stuck in sort of interest bearing accounts, which isn’t really that beneficial because we know that cash is not a long-term investment strategy. You don’t really want to be growing your returns in interest income. You want to be in the share market, getting those capital gains because you’ve committed to this long-term period, so that the the returns are tax free at the end.
On whether you can withdraw money without penalties:
If you take it out, you can’t put it back. If you take out some of that money you’ve used up your R36,000 per year or a portion of your lifetime limit of R500,000, but it does give you flexibility as to where you invest – there’s no Regulation 28 involved – and it does give you freedom.
- The tax-free savings account has value in an overall financial plan
- Build up your tax-free savings long before retirement â Wynand Gouws
- Tax-free savings accounts (TFSAs): âtax havenâ or bad bet for investors? Sizing up benefits
