The South African National Treasury has drafted various proposals around retirement reform to encourage citizens to get into the habit of saving for their retirement.
Over the years government has held numerous consultations with industry stakeholders around proposed reforms. As a key stakeholder this enables Absa to help shape the development of the reform by submitting its opinions on the draft proposals.
As of 1 March 2015, Treasury intends to allow the introduction of Tax Free Savings Accounts in South Africa.
“Absa is excited about the opportunity the retirement reform brings to clients, and supports the intent and spirit of the initiative and what it wants to achieve. We are working on ways to actively support the new regulations by making Tax Free Saving Accounts available to the market. This also ensures that we comply with the rules and regulations as set out by the National Treasury,” says Matt Hunter, Head of Savings and Investments at Absa Retail Banking,
“We will be launching a range of products once Treasury permits to encourage savings in South Africa. Absa has the benefit of having a bank and an asset management business within the stable that can provide these.”
What is a tax free savings account?
A Tax Free Savings account is account that allows you to invest money while earning returns that are free from income, dividends or capital gains tax.
“The key objective of the savings proposal is to encourage individuals to save long term in addition to their pension fund or retirement annuity,” explains Hunter. “Having access to funds in an emergency or to protect you from unexpected financial shocks are just as important as saving for your retirement.”
Adopting more disciplined savings behaviour increases household savings and can also have broader macro-economic benefits in terms of higher investment and export growth. This, in turn, would boost the country’s growth rate.
How will tax free savings accounts work?
- Total contributions to a Tax Free Savings account are limited to R30,000 per tax year and the total lifetime contribution limit currently at R500,000. Any unused amount will not roll over to the next tax year. This means that if you don’t manage to save R30,000 per year, you will not be allowed to carry over the shortfall to the following year.
- Where a taxpayer contributes in excess of the prescribed annual contribution limit, a penalty of 40% on the amount of the excess contribution will be levied by SARS on the individual.
Why should investors take note of tax free savings?
The current mechanism to incentivise non-retirement household savings is the annual interest tax exemption, which is R23,800 for individuals under the age of 65 and R34,500 for individuals older than 65 years. It is intended that this exemption limit will remain in place but not be increased in line with inflation going forward.
This should encourage investors to begin utilising tax-free savings accounts, particularly benefiting more disciplined investors who contribute over a number of years and receive returns and/or gains in excess of these current exemptions.
Investors will be able to hold investments like units in collective investment schemes, interest-bearing savings accounts, bank fixed deposits and retail savings bonds through the proposed new product.
These types of products will be offered, in accordance with the reform regulation, by licensed banks, long-term insurance companies, managers of registered collective investment schemes, authorised users, linked-investment service providers and the government will be permitted to offer tax-free savings accounts to the public.
Tax free savings tips
The government has set the annual contribution limit at R30,000 with the intent of increasing this amount with inflation over time.
“Starting early by investing funds in a tax free savings account has its advantages due to the power of compound interest. Consider an investor who puts R30,000 into a tax-free savings account at the beginning of every tax year for the next 17 years, invested in a product earning 6% per year. After 17 years, it would be worth R 946,000. In comparison, if the investor started a year later, the balance would be R 859,000, while the cost of not starting earlier is R 87,000,” Hunter illustrates.
It therefore makes sense to use your tax-free allowance every year to build up significant savings with returns protected from tax.
“But be careful not to over-contribute. SARS will levy a tax of 40% on any over-contribution amount which will diminish your savings. So make sure that you do not exceed the annual and lifetime limits, stresses Hunter.
“When taxes reduce the amount of interest available to continue earning interest, the value of a savings account diminishes dramatically compared to an account that is not taxed. Investors must consider tax-advantaged ways of saving and investing, that way more of their money is available to grow over the long-term,” concludes Hunter.