PPS Investments launches a tax free investment account

Hugo Malherbe, Executive of Product Development at PPS Investments.

PPS Investments, which had initially grown its footprint as a foremost specialist in providing investments for graduate professionals, later expanding its offerings to all investors, has launched a tax free investment account for all investors who wish to supplement their long-term savings tax efficiently.

The tax free investment account allows investors to contribute a maximum allowable amount without being charged capital gains tax (CGT) when accessing these savings or switching funds, dividend tax when receiving dividends, or income tax on interest earned on these contribution amounts. All proceeds are tax-free in their hands.

Exceeding the contribution limits of a tax free savings vehicle will lead to a penalty tax of 40% paid to the South African Revenue Service (SARS) on the excess amount. PPS Investments will monitor clients’ contributions into PPS Investments’ range of tax free investment accounts to ensure that these investments remain within the legislated annual and lifetime contribution limits.

The tax free investment account generally provides the greatest benefit as a long-term savings vehicle and is best used in combination with existing retirement savings for post-retirement support.

Investors should caution against using the offering for short-term savings goals due to the contribution limits being depleted and eroding possible tax relief on future savings. This is especially important to consider when opening accounts for minors.

Given that the contribution limits are R30 000 per year and R500 000 in total, it will most likely not be the only investment vehicle used, but it is a valuable element to incorporate into a broader financial plan provided it is used, and chosen, wisely.

Retirement annuity funds, pension funds and provident funds would generally remain the first options for long-term savings. With these options interest earned, dividends received and capital growth will also be tax free, but a tax benefit will also be received on contributions to these funds. There is however a tax implication on these savings at retirement when making withdrawals and when receiving annuity income from these savings after retirement. The extent of these tax implications is dependent on the size of retirement withdrawals and annual annuity income levels post retirement. So once an optimal retirement savings contribution level is reached per annum, an annual contribution to the tax free investment account could provide a more tax-efficient savings option than an additional retirement fund contribution, provided the investor has sufficient retirement savings built up from previous years.

A contribution to a tax free investment account should ideally be reviewed on an annual basis with a financial planner that can assess the investor’s current level of retirement savings and determine the most tax efficient savings option. An opportune time to do so is towards the end of each tax year as part of the investor’s annual tax planning conversation, which should enable them to accurately determine if their RA contributions during the year warrant an allocation to a tax investment account. Some investors on an annual basis may want to set up a debit order, and use the end of the tax year to calibrate.