Your tax-free savings options

Published Jul 18, 2015

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The government launched the tax-free savings account in March 2015 – a simple product designed to incentivise you to save.

The benefit of this type of account is that your savings are free of income tax, dividends tax and capital gains tax.

Since March, almost every financial institution has launched a tax-free savings account, leaving you with a bewildering choice.

Banks are offering tax-free accounts in the form of savings accounts and fixed deposits.

But if you want inflation-beating returns for longer-term savings, you should look for a tax-free account that offers underlying investments with some exposure to asset classes that can deliver higher returns, such as equities and listed property.

Investment platforms (linked- investment services providers) are offering tax-free savings accounts with access to unit trusts and exchange traded funds (ETFs) from a variety of managers.

Unit trust companies are offering tax-free savings accounts with access to their own funds. Online stockbrokers are offering accounts with access to ETFs, because ETFs are listed on stock exchanges.

When you choose one of these accounts, you need to find out what the underlying investments are and what they cost, and you need a detailed breakdown of the administration costs, policy costs, any fees for switching your investments and any penalties for early withdrawals.

In our table (go to the link at the end of this story), we publish some of the information you will need if you are going to choose a tax-free savings account that offers access to unit trusts and exchange traded products.

The table excludes the costs of the underlying funds, which vary greatly depending on the asset class in which the funds are invested. A money market fund could cost as little as 0.29 percent (including VAT) a year, while a fund that invests in offshore funds may charge as much as 1.59 percent a year.

Most investment platforms offer funds with lower fees than the funds you can access when you invest directly with the unit trust company. But some platforms may have a higher fees on funds and offer a rebate or discount on the administration fee.

The word “none” in the column headed “Switch fee” means there is no fee for switching between underlying funds, but you will pay brokerage costs when switching between ETFs on an online platform.

Bear in mind, when you compare costs, that a fee of R10 a month on a R30 000 investment is a fee of 0.4 percent, or more if you invest less.

Also don’t forget that if you use a financial adviser, you will pay an advice fee. The table excludes these fees, because you should negotiate them with your adviser.

The asset classes that provide high growth will benefit most from being in a tax-free investment, because the tax-free growth will compound to your benefit.

The key features of a tax-free savings account are:

* You can invest a maximum of R30 000 a year and up to R500 000 over your lifetime.

* If you exceed either limit, you will pay tax of 40 percent on any amount above the limit.

* You can withdraw your money at any stage, and you must be paid within a set number of days. Limited penalties for early withdrawal will apply only where you have committed to a certain investment term.

* Withdrawals do not reduce the contributions that count towards the annual or the lifetime limit.

For more information, the current edition of Personal Finance magazine contains a 10-point guide to tax-free savings accounts.

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