Maximise the benefits of tax-free compound interest for this tax year

Nick Battersby, CEO of PPS Investments.

In order to maximise the benefits of tax-free compound interest for this tax year, investors have less than two weeks to consider a lump sum contribution to a tax free savings vehicle. The deadline is the end of February this year if an investor has not yet reached their annual contribution limit, and ideally their retirement annuity has been topped up. Investors may contribute up to a maximum of R30 000 in total for the tax year (and R500 000 over their lifetimes).

Nick Battersby, CEO of PPS Investments says, “A tax free savings vehicle is effectively a ‘gift’ of tax free returns and income from the government to encourage you to save. With a tax free savings vehicle, contributions are not tax deductible and the growth is completely tax free so investors don’t pay tax on dividends, on interest income, on withdrawals or switches. The tax benefits will allow your investment to grow tax free, and all proceeds will be tax free in your hands.”

Since individual investors receive annual interest exemptions and exclusions on capital gains, the benefits of tax free growth on their tax free savings accounts compared to an investment in a discretionary investment becomes more evident over longer investment periods.

“When saving for longer-term goals, a tax free investment account becomes a more viable option while a discretionary investment account may be a better option for short-term goals like a holiday. You will have unrestricted access to the funds in which you’ve invested and will be allowed to make full or partial withdrawals from your investment,” says Battersby.

He however cautions, “even though you will have unrestricted access, it is highly recommended that you view your investment as a long-term savings vehicle which supplements your standard retirement savings vehicle, thus allowing your investment to benefit from the compound effect of tax-free growth. Remember, withdrawals cannot be replenished.”

“Remember that exceeding contribution limits will lead to a penalty tax of 40% paid to the South African Revenue Service (SARS) on the excess amount. You are responsible for ensuring that your annual payments across all approved tax free savings accounts with all other product providers do not exceed the annual and lifetime contribution limits.

“Of course, your annual tax planning conversation with your financial planner can help to determine how you can incorporate this product offering as part of your overall savings and investments portfolio,” concludes Battersby.