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Use Tax-Free annual allocation ahead of new tax year

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The introduction of Tax-Free Savings Accounts (TFSA) by National Treasury on 01 March 2015 was aimed at increasing the South African savings rate and encouraging consumers who previously did not have any savings or investments to start on their savings journey; which would benefit both them and their families in the long run.

“Contribute at the beginning of the tax year to receive the full benefit of your Tax-Free Savings Account. This will also ensure that both the capital growth and return on the investment will not be subject to any taxation; which means that there is no capital gains tax, no dividends tax and no tax on interest earned,” says Aneesa Razack, CEO Share Investing, FNB Wealth and Investments.

The 2017 SaveTaxFree Survey found that up to 13% of the TFSAs opened in 2017 were for first time savers, supporting the view that TFSAs are in fact helping drive higher investment inclusion and inadvertently the savings rate in South Africa. For those who are already well into their investment journey, TFSAs can also be included as part of a balanced and diversified portfolio.

Since 2017, FNB has seen 18% year on year growth in the uptake of Tax-Free Shares, 55% for Tax-Free Cash Deposits and 86% for its Horizon Series Unit Trust which caters for different life stages.

Investors are increasingly starting to see the benefits of utilising TFSAs for both cash and equities’ investment. “Cash had, in past years, taken the lion’s share of total value of TSFA investments, and by 2017, we saw total equities investments growing significantly from R935 million in 2016 to just over R2 billion in 2017, compared to total cash investments of R2.4 billion in 2017. Research has broadly found equities to outperform all asset classes in the long term, and so it is encouraging seeing more investors take investment positions in equities,” says Razack.

Something investors rarely think about and speak of with respect to TSFAs is the benefit of funding your full annual allowance of R33 000 as early as possible into the tax year. The reason is that it is linked to the benefits of receiving compound interest. If you fully fund your allowance on 1 March for example, the investment will earn interest on the full R33 000 for a full year. But a staggered approach means that you earn interest on a smaller amount over the year. The result is that the earlier funded portfolio will have a higher interest benefit than the one staggered throughout the year.

“Generating wealth through investments like a share portfolio is always a wise decision. The key to ensuring that it gives you the returns that you are looking for is to start small, identify your long-term goals and understand that there will be a certain degree of risk involved, but it will be worth it at the end,” concludes Razack.

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Alan Straton

Chief Cook, Bottle Washer and Broom Mechanic at MyPE
Passionate about Port Elizabeth and definitely NOT packing for Perth. Alan's ethos is epitomised in the words of Nelson Mandela; "I have fought against white domination and I have fought against black domination. I have cherished the idea of a democratic and free society. If need be, it is an ideal for which I am prepared to die." See more articles by Alan.