Not only poor benefit from tax free savings

Affluent people should embrace the opportunity to invest in tax-free savings products, according to Patrick Sheehy, head of product management at Glacier by Sanlam.

“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,” said Sheehy.

In his view tax free savings accounts could shelter affluent clients 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. A family of four, which includes two children, can save up to R120 000 a year, tax free,” said Sheehy.

“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 – that is invest R2 500 into the discretionary savings plan and R2 500 into a tax free savings account.”

For the higher income taxpayers, the saving in tax over the 16-and-a-half-year period – the length of time it will take to reach the R500 000 life time 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,” explained Sheehy.

He cautioned, though, that tax free savings accounts can complement, but not replace, retirement savings.

Returns will vary – depending on the product selected – but investors will see a higher tax saving the longer they are invested. “The earlier someone starts to invest in a tax free savings vehicle, the more he or she stands to gain in tax savings over time,” said Sheehy.

South Africa, on the whole, has a notoriously bad savings rate, prompting National Treasury to have introduced tax free savings products to encourage people to save more and increase their ability to afford to retire.

“Worldwide, we’ve seen the positive results in the take-up of these products and we hope to see a similar appetite locally,” said Sheehy.

“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benefits are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn.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.”

He also pointed out that it is important to note that the 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.

“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,” said Sheehy.

“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.”

Fin24