Tax Free Savings Accounts
You will be aware from our recent articles and extensive coverage in the press that the recent budget finalized the enabling legislation for Tax Free Savings Accounts. We believe that this presents a great wealth planning opportunity for many of our clients.
From 1 March 2015 all taxpayers will be able to make an annual contribution limited to R30 000 to a cumulative life time limit of R500 000. The Investment must be in vehicles governed by strict rules. Once the investment has been made you will be provided cover from Income Tax on Interest, Dividends Tax and Capital Gains Tax.
This is in addition to the annual tax-free allowance (R 23 800 if under 65 and R 34 500 if over 65) and the annual CGT tax free allowance of R 30 000.
The Pitfalls and Dangers to look out for when Investing!
- If you invest in excess of your R 30 000 allowance in a year, SARS will charge a 40% tax on that allowance;
- If you withdraw your investment then you lose the amount already invested from your life time limit – in other words if you invested R 25 000 for four years and withdraw this amount your life time limit is now effectively reduced by R 100 000 to R 400 000;
- You are limited to investing in compliant products which may not be in line with your investment strategy;
- Currently the legislation does not allow you to switch investment products, but is expected to be amended to enable going forward;
- Unlike Retirement Savings Products you do not get a tax deduction when you invest and the capital will form part of your dutiable estate.
Who Should Invest
The normal analysis in making an investment must still be undertaken and we believe should include considering the following:
- Pay off expensive short term debt;
- Make full use of your tax deductible retirement funding options;
- Build up an accessible savings fund to provide for short term funding requirements;
Then look to invest in these products as part of your total Wealth Planning.
Currently the race is on between most of the major investment houses to put together TSA (Tax Free Saving Account) products. We have seen products which are simply wrapped money market accounts through to more complex Exchange Traded Funds and Equity unit Trusts. We believe that with time further more innovative products will be approved and released. Make sure that when you are investing you are doing so because the product makes sense and not simply because it is a TSA.
It is our view that these products will make sense in most cases where investment funds are available for younger people (including children as an Education Fund) as it will take 17 years to reach the life time limit. If you are an older investor or only looking to invest for a short period of time it will only make sense if you have a very high tax bracket are already utilizing all the tax free allowances and are happy to lose part of your life time limit.
These products show their greatest value as they accumulate and therefore should be long term both in intention and in their underlying investments.
If these products meet your investing criteria they make a lot of sense (for you and your dependents!), don’t rush into making a decision – you have until 29 February 2016 to make your first contribution.
We do have access to various products through our alliance partners and if you want to find out more about these products please do not hesitate to contact us.