Thandi Ngwane, Head of Distribution at Standard Bank Wealth, Investments and Acquisitions
Finance Minister Tito Mboweni’s budget speech is fast-approaching and so is the scheduled review of South Africa’s credit rating by Moody’s Investor Services. This is an important time for the country and taxpayers alike who are eagerly awaiting their financial fate.
What coincides with these decisive moments is the end of the tax year. With less than three weeks to go, now is the time to consider whether you have made the maximum allowable contribution to your tax-free investment. Those who don’t yet hold a tax-free investment, but are sitting on additional money to save, can open one now and earn tax-free returns for the duration of their investment.
Know your limits
Launched by government in 2015 in a bid to encourage South Africans to save more, tax-free investments (TFIs) are vehicles that allow for individuals to contribute up to a certain limit and earn returns on the money invested, as the name suggests, tax free. Any contribution made to the TFI is exempt from tax on interest, dividends and capital gains.
It is important to note however that there are limits on how much one can contribute per year and throughout their lifetime. Limits that have been imposed by government on TFIs currently sit at R33 000 per annum (up from R30 000 pa in 2017) with a R500 000 lifetime limit. It is hoped that over time, the limits will be adjusted to support those who are looking to invest for the long term.
For now, investors should resist the temptation to contribute more than the limits allow for. If you do exceed the contribution cap of R33 000 per annum, you will be penalised at 40% on your contributions over the allowed annual maximum.
Beware the withdrawal
While the TFI structure allows for you to withdraw from your investment at any time, to truly reap the rewards of the offering means staying invested for the long term. The idea is that the investment vehicle is used to invest for the long term to allow for the magic of compounding to take place.
The benefits of TFIs are best realised when keeping the investment out of sight and mind over a period of at least three years. When combining the impact of compounding over the long term coupled with the tax-efficiency of this product, it pays to invest for the long-haul.
Investors are, however, entitled to a transfer of their tax-free savings from one provider to another. This change came about in 2018 so that an investor is able to switch between providers should they not be happy with their returns or the platform used, for example, without impacting their annual and lifetime contribution limits.
Significant benefits
Some ways to use your TFI could be to subsidise your retirement savings in a tax-efficient manner or to save for your child’s education. If you have contributed more than the deductable limits to your Retirement Annuity, for example, you can invest the extra funds into a TFI.
If you are using a TFI to save for your child’s education, and it is in their name, it is advisable to remain cognisant of exhausting their R500 000 lifetime limit by the time they come of age. While some may view this as a flaw in the system, it allows for your next of kin to invest a lump sum amount into another investment vehicle.
Where do I start?
The end of the tax year is the perfect time to re-visit your investment plan. It allows you the opportunity to ensure that you maximise on the benefits afforded by the tax deductions.
At Standarad Bank’s asset management firm Melville Douglas, you can start your monthly contribution from as little as R500 per month or you can invest a lump sum of R10 000. Melville Douglas exists within the Standard Bank Group and manages investments across a wide range of mandates.
If you need any assistance or financial advice, it would be advisable to reach out to your professional financial adviser who can help you make the most appropriate investment decision.
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