National Savings Month should inspire you to commit to save, or to save more. If you haven’t heard of tax-free savings accounts, or don’t know how they work, you could be losing out on an opportunity to boost your savings.
Tax-free savings accounts were launched some 16 months ago, but a recent survey by Sanlam has found that many people are either unaware of these accounts or are misinformed about them.
Tax-free savings accounts enable to you save without paying the three different taxes that apply to investments: income tax on interest, dividends tax and capital gains tax (CGT). Not having to pay these taxes is particularly relevant when you save over the long term, because the dividends, interest and growth on your capital will compound significantly.
Sanlam conducted a survey among 402 people earning between R10 000 and R40 000 a month who said they were saving or were considering starting to save within the next six months. It found that an alarming 37 percent of respondents did not know about tax-free savings accounts. Only 12 percent of the 402 people had opened an account, while 51 percent knew about the products but had not opened one.
Recent research by Intellidex among financial services com- panies shows that there has been a good take-up of tax-free accounts: there are almost 262 500 accounts with some R2.6 billion in them.
Intellidex, a research and media company, gathered information from 27 providers of tax-free savings accounts it estimated to cover 95 percent of the tax-free savings account market. Its research found that about 21 percent of tax-free savings accounts were opened by people who previously had not been saving.
The Sanlam survey shows that, of those who have opened tax-free accounts, 26 percent are using them only to save for unforeseen circumstances, 34 percent are saving only for a specific goal and 34 percent are saving for both purposes.
Karin Muller, the head of growth market solutions at Sanlam Personal Finance, says although tax-free accounts can be used to save for short-term goals – because they are simple and flexible products – you will benefit most from the tax breaks if you invest for the longer term (five or more years).
The Sanlam survey found that more respondents were investing in other financial products, such as savings accounts (79 percent), bank cash savings (42 percent), shares (20 percent), a savings club with friends (19 percent), an education policy (19 percent), a stokvel or rotating savings club (17 percent), unit trusts (16 percent) and unbanked cash savings (15 percent). But they don’t understand the benefit of using a tax-free savings account to invest, particularly in shares and unit trusts.
A much higher number of those surveyed had a pension or provident fund (56 percent) and/or a retirement annuity (RA) fund (48 percent).
Retirement funds have more tax benefits than tax-free savings accounts, because, in addition to your savings being free of income tax, dividends tax and CGT, you can claim a tax deduction for your contributions. Because your retirement fund contributions are tax-deductible, the amount you save will be greater than the amount you put into a tax-free savings account. For example, if you want to save a before-tax amount of R500 in a tax-free savings account and you are on a marginal tax rate of 30 percent, you would have only R350 to contribute (R500 x 30 percent = R150).
Furthermore, contributions to retirement funds within the tax-deduction limits, as well as the growth on the contributions, can be passed on to your dependants free of estate duty.
On retirement, you pay tax on any lump sum you withdraw from your retirement fund that exceeds R500 000 (or less if you made withdrawals before retirement). The income from the annuity that members of pension and RA funds are required to buy with at least two-thirds of their savings at retirement will also be taxed.
The drawback of a retirement fund is that you generally cannot access your savings until you retire. (RA members can access their savings only after they reach the age of 55.)
You can access your retirement savings if you resign from an employer that sponsors a pension or provident fund, but your withdrawal will be taxed at a more punitive rate than if you withdrew a lump sum at retirement.
Therefore, you need to have non-retirement, or discretionary, savings. Although the real benefit of a tax-free savings account can be realised only if you save over the long term, you can access your savings whenever you need them, and you can be charged a limited withdrawal penalty only if there is a term on the investment.
‘CAN’T AFFORD TO SAVE’ IS NOT AN EXCUSE
Two of the main reasons people aren’t using tax-free savings accounts is that they don’t know about them, or they don’t know enough about them, and they believe they do not have enough money to save. But committing to saving is often a matter of getting your priorities right.
Didintle Mokonoto, a financial adviser at Alexander Forbes Financial Planning Consultants, who holds the Certified Financial Planner accreditation, says anyone can save something, no matter how little they earn.
She says the key is to save before you spend. “If you save a portion of your income as soon as you get paid, you won’t have a chance to miss it, and you’ll be free to spend the remainder on your needs and wants, with less anxiety about the future.”
Saving regularly is a great way to pay for expensive items that you may not be able to afford immediately, such as a car, holiday or wedding.
“You could use your credit card to pay for these ‘want items’, but this will end up costing you more because of the interest payable.” It can also lead to debt problems if you don’t manage your repayments properly, Mokonoto says.
When you save, the compounding effect of the interest or returns you earn works in your favour, but when you borrow, the interest compounds in favour of the bank or loan provider.
Mokonoto says people make excuses, such as: “I’ll save when I get an increase, when I get to a certain age, when I sign that big deal, or when I’ve paid my car off.” But these excuses will not motivate you to start saving.
Saving and budgeting go hand in hand. If you learn how to budget appropriately, you will know that every month a certain portion of your income is going to your savings, Mokonoto says.