Tax-free savings accounts came into effect on 1 March 2015, allowing all South Africans to invest up to R30 000 a year without paying tax on interest income, capital gains or local and foreign dividends on your investment.
Opening up a tax-free account is simple. However, there is a significant range of choices offered by banks, life companies and collective investment companies in the form of unit trusts and exchanged traded funds.
It’s essential that you choose the correct institution with the appropriate product offering to meet your needs. The aim of a tax-free savings account is to promote long-term savings and should be seen as long-term in nature.
Government only allows you to contribute up to R30 000 per annum to a total contribution of R500 000 in one’s life. If you add R30 000 and then take R20 000 out in a few months, you don’t get the credit and you can’t add the R20 000 later on to make up the annual or life-time contribution limits. So you must think long-term to reap the full benefits.
Match your investment to your time horizon
As a long-term investment, you have to consider matching your time horizon with the underlying investment. If, for example, you’re 40 years old and want to supplement your retirement savings, that would mean saving for 20 years to the age of 60 and, even then, using that tax-free account to draw an income, tax-free, over possibly another 20 years.
In this case, 20-40 years is a long time to leave the money in a call account earning interest that is not growing ahead of inflation. One would rather opt for an investment that focused on growth assets, such as shares and property.
One also needs to be sure that the product offers the flexibility in asset allocation to meet the changing needs over the life cycle of the product. It needs to be transparent and low cost.
STANLIB Unit Trust
The STANLIB Unit Trust account is ideal to use as a long-term tax-free savings account and provides flexibility on various levels:
- Flexibility of asset allocation through STANLIB’s wide range of fund choices including: money market funds, asset allocation balanced funds, property, equity and various global funds to meet the various needs of the investor, as well as the ever-changing market conditions.
- Flexibility in the function to switch funds within 24-hours at no additional cost. The only charges are the underlying service fees of the selected funds, making this a very cost-effective solution.
- Flexibility to invest lump sums or debit orders, which you can stop and start at any time as your personal circumstances change.
What you need to know
Investors should note that any contributions in excess of the R30 000 per annum limit will be taxed at 40%. Although the National Treasury has stated that product providers must disclose these contribution limits and the consequences for breaching them when marketing products, it remains the responsibility of the investor to ensure that they adhere to the annual limit.
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