By Gavin Butchart, Financial Director and Head of Mauritius office at Brenthurst Wealth
The tax-free savings account (TFSA) is yet to be taken seriously as an invest-ment option for adults. It is considered a start-out kit for kids with a tax benefit that dwarfs the relief provided by retirement annuities, for example.
But it is a jaded perception and not a technically sound argument. TFSAs are serious contenders. It offers a host of benefits that will complement any balanced investment portfolio, preferably over the long run.
This discretionary investment product is only available to individuals in South Africa and was introduced by the State to encourage a greater savings culture in the country. What sweetens the deal, are the tax exemptions that comes with it from withholding tax on dividends or interest to income and capital gains tax on any switches or withdrawals from the account. The only drawback of the product is the R33,000 limit in annual contribu-tion and R500,000 over an investor’s lifetime.
But the view that a tax-friendly saving of R33,000 per annum is pocket change is a fallacy, as a built-up kitty eventually shows significant growth. If an investor utilizes the maximum benefit allocation every year, it will take just over 15 years to reach the lifetime limit. At a rate of 12% in capital over 12 months the value added every year, the investment should be worth approximately R1.4 million in 15 years’ time or R580 000 in today’s money terms (assuming 6% average inflation).
That shows great value for money and is a plausible portfolio filler for any family member in any age range. It is a fantastic starter-solution and a tax haven where investors can hoard their cash, and just forget about it as it takes care of itself in years to come. There is an abundance of TFSAs available in the market. They come in all kinds of shapes and sizes and are offered by anybody ranging from a com-mercial bank to an asset manager.
TFSAs can take the form of money market or fixed-term bank accounts, a unit trust investment or a JSE-listed exchange traded fund. TFSAs can be issued by banks, long-term insurers, unit trust managers, mutual banks or cooperative banks. TFSAs are very flexible in its structure and allows investors to cease or increase contributions at will, whether monthly, quarterly, annually or on an ad hoc basis, however some providers insist on a minimum contribution level for administrative purposes. While the investor is free to withdraw funds from a TFSA at any time, early withdrawals penalties do apply and differ between providers.
It is essential to understand the longer-term impli-cations of early withdrawals that compromise investment returns. Any withdrawal made from a TFSA is deducted from the lifetime contribution limit.
For example, if R200,000 has been saved in a TFSA and a full fund withdrawal is made, the total remaining lifetime contribution will reduce to R300,000.
TFSA are offered from banks and Linked investment services providers (LISP). A LISP offers better variety as most banks only offer money market funds while most LISP’s offer a wider selection of money market and growth unit trust funds both locally and offshore.
Even though the capital will never be invested for a fixed term and will always remain fully liquid, here are the other specifications of the TFSA:
- Parents may make contributions to a TFSA on behalf of a minor, however, proceeds from with-drawals must be paid into a bank account in the minor’s name.
- When accessing the investment, funds will be avail-able within three business days, but this may also depend on the financial institution’s processes.
- Any amounts exceeding the R33 000 annual limit will be taxed at a rate of 40%. This means, if the investor paid R1, 000 over the limit, he or she will be liable for R400 tax. Should investors have more than one savings account, it will remain their responsibility to ensure that they do not over-contribute to their tax-free savings accounts they may have with various financial service providers.
- When it comes to estate planning the full value of the investment is paid to an investor’s estate in the unfortunate event of death and unfortunately cannot be paid out directly to a beneficiary.
- The TFSA will be frozen; and beneficiaries will not have immediate access to this investment until the Estate is wound up. This means a beneficiary should be nominated in the Will and full estate duty and executor’s fees will be applicable.
Benefits of investing in a TFSA
THE END OF THE TAX YEAR IS 29 FEBRUARY 2020. TO OPEN OR ADD TO A TAX-FREE SAVINGS ACCOUNT ACT IMMEDIATELY. Payments and supporting documents need to be signed and submitted by 26 Feb 2020 in order to process and finalize application.
Our team at all offices nationwide can assist investors interested to add this option to their investment strategies.