Since it was first introduced on March 1 2015, Tax-Free Savings Account (TFSAs) have received a lot of media attention. When they were first introduced with an annual contribution limit of only R30 000, most people were less than enthused about it, but three years later, it’s worth taking another look at.
According to treasury, the TFSA was designed to encourage a savings culture, without having to pay tax on the earned interest. The secondary objective was to increase the overall level of savings in the economy, which would bring wider macroeconomic benefits.
According to a survey by Intellidex, a total of 207 172 accounts were opened in the 12 months to February 28 2017 (averaging 567 accounts a day), bringing the total number of TFSAs opened since inception in March 2015 to 459 848.
Total assets in these accounts amount to R5.174-billion, implying an average account value of R11 251. With the new accounts opened, TFSAs continue to dominate the market. The major asset class held in TFSAs is in the form of cash at just over 47% (from 51% the previous year), followed closely by equities, which rose from 36% to 40%.
What are the benefits of TFSAs?
The TFSA is a great saving and investment vehicle because it allows any South African over the age of 18, regardless of income level, to earn interest on a number of investments without having to pay income tax on the money earned.
You can open your TFSA at a bank, through a broker or an advisor at an insurance company. You can also open multiple accounts with different financial institutions. Just like every other account, interest rates vary on tax free savings accounts. The rate of return will depend on the investment you purchase.
Tax-Free Savings Accounts typically offer lower interest rates than other high interest savings accounts. Holders of this account who don’t max it out have more opportunities to invest in just about anything. In terms of investments options, TFSAs are flexible. You can choose from a wide range of investment options — stocks, bonds, mutual funds, exchange-traded funds that are classified as collective investment schemes, fixed deposits, unit trusts, retail savings bonds, linked investment products and certain endowment policies issued by long-term insurers. Products that expose an investor to an excessive level of market risk are excluded.
TFSAs are flexible and can be used for shorter-term savings, or as a strategic part of your long-term financial plan. Their contribution limit that qualifies for tax exemption is R33 000 per annum, up to a maximum of R500 000 per lifetime. You can make periodic monthly contributions or partial contributions to your TFSA. Any unused contribution room can be carried into future years indefinitely.
You are allowed to transfer any portion of the value in any of your TFSA to another service provider, and service providers can facilitate such a transfer. Note that financial institutions might charge a transfer fee to move your account. Your service provider will then issue a certificate specifying the details of the transfer.
Additionally you have two weeks to transfer the amount to the new service provider, and the transferred amount will not count towards the annual contribution limit.
This was not allowed during the first year of the incentive, until March 1 2016, to allow all product providers to prepare.You should keep this certificate of transfer for a minimum of five years.
How to choose the best TFSA
If you want to take a DIY approach to investing, you can open a self-directed TFSA account and choose for yourself which stocks you want to invest in. When choosing a tax-free savings account, there are a few features you should pay attention to, starting with the interest rate.
Some accounts offer “teaser” rates that are higher to start with, but your money will likely earn more interest in a TFSA that offers an everyday high interest rate. Other features to consider include whether the account charges a monthly fee or transaction fees.
You should also be informed of whether the account allows you to easily transfer money back and forth with your regular chequing account.
You can withdraw money from your TFSA at any time, for any reason, without paying tax. Funds can be accessed within seven business days. This simplifies the accounts and increases liquidity, both of which encourage added savings.
When you withdraw money from your TFSA and then try to deposit the money back within the same year, it could cause your total contributions for the year to exceed the annual contribution room limit.
In that case, there is a penalty of 40% of the excess amount. For example: if you invest R35 000 — exceeded the annual limit by R2 000 — 40% of R2000 = R800 must be paid to SARS. This penalty is added to the normal tax payable on assessment.
If you’re contributing to or withdrawing from multiple TFSAs make sure you’ve got a system to keep track of everything so you don’t over-contribute.
You can also have more than one tax-free investment, but you are limited to the annual limits per tax year.
Disadvantages of TFSAs
Like any other investment vehicle there are rules to be followed. You cannot use the account as transactional account. Debit or stop orders and ATM transactions will not be possible from these accounts.
Only new accounts will qualify as the idea is to encourage new savings, in other words existing accounts may not be converted. In the case of fixed deposits (or policies with a guaranteed return) early withdrawal penalties are allowed.
Think long term
Look at a TFSA as part of your short- and long-term savings plan! If after doing your own research you’re still not sure what’s right for you, your best bet might be consulting a financial advisor. She can give you tailored advice. Your financial advisor can provide the objective advice and portfolio strategy you need to reach your investment goals.
Should you open a TFSA?
If you open a TFSA, you could use it to save for your retirement, to supplement other income you may have, or you could use it for short-term goals like buying a home, a car, or to start a business. If you have money to save, it’s a good idea to put it in a TFSA.
Saving some money and ourselves in the process
It is disappointing that generally, indebted South Africans learn about financial literacy only upon experiencing financial troubles. Financial literacy as a concept is the possession of knowledge that allows an individual to make informed and effective decisions with their financial resources. July is National Savings Month. It is an opportunity for the country’s banks and financial institutions to raise awareness of the importance of savings, and for each and every South African to revisit their financial plan.
David Mc Call; Executive Investments Retail and Business Banking at Nedbank, refers to this education as “the maths of money”. He says: “This is primarily about understanding the law of compound interest and its implications on savings and investments, but also the negative impact it has on the indebted.”
National Savings Month comes amid the increasing cost of utilities, with projected increases in the energy sector likely to cause increases across the entire value chain. This will hurt the poorest the most, and there will be complaints, but it is important to remember that July Savings Month is not limited only to the saving of income, but encompasses resources and utilities as well. The effective use of electricity, water and data to avoid wastage and large monthly bills is in itself a form of saving. Maintaining consciousness of one’s actions and choices affects the environment.
These and other forms of saving should be encouraged, even in the workplace. The theme for National Savings Month 2018 is “employer assisted saving”.
Nedbank has developed a 10-point plan with regards to how we may start to save. The operative word is “start”. One of the most effective methods to instil disciplined behaviour and avoid unnecessary expenditure is budgeting. Why are we as South Africans so bad at savings, and why are we so over-indebted?
McCall says: “Intuitively, everyone knows they should be saving, but everyone needs to question their unique individual circumstances that preclude them from saving.”
Developed countries in Europe have a huge culture of saving, although they usually have low interest rates, yielding less benefit as compared to South Africans, where there are relatively good interest rates for those who invest. But the law of compound interest also affects the indebted; interest builds on defaulted payments, essentially trapping the individual in debt.
Are you able to sacrifice certain behaviours and habits that could contribute to a saving of some sort? This is the question to be answered this Savings Month.
Inflation is defined as the rate at which prices increase, and considering the volatility of money, it is evident that phenomena such as these are cyclical. “Things change from a market point of view, and as a result personal circumstances change as well; savings can act as a buffer when circumstances in the economy affect personal circumstances,” says McCall.
Education and financial literacy
With awareness comes choice. The financial service providers and media institutions have a responsibility to educate the public about the basics of two concepts: the source of money, and the use of money. Simplifying things to this level allows a culture of saving to be easily explained and encouraged from an early age.
Millennials are often criticised for their addiction to instant gratification while savings and investments, often requiring time, are of little interest to them. But as the “do what you love” philosophy grows, more people are finding ways to turn their passions into profits. It is therefore most important that the most salient entrepreneurship education is made available to the youth, both in the private and public sectors.
Financial and insurance service providers have tried in recent years to appeal to the South African working class with various forms of savings, from unit trusts to retail savings bonds, but mostly life cover and funeral policies. Stokvels remain valid and because communities prefer being unbanked to avoid “unreasonable” charges. Some communities have logistics challenges such as difficulties in getting to bank branches, and the costs of formal banking structures remain prohibitive for many individuals. In townships, young entrepreneurs are exploring alternative models of savings through co-operative financial services. The model is based on citizens buying equity in local small businesses with a vision to grow.
Nedbank, aligned to its brand promise of sustainability and social responsibility, understands the social and economic landscape of South Africa. The bank encourages maintaining a varied portfolio across different products and financial service providers. It is important in the decision-making process to consider one’s life cycle, and consider short, medium and long-term goals and plan accordingly. To remain un-banked is not good for the growth and economy of our country, experts say.
“Nedbank is a money expert with the experience to keep money, lend money and facilitate the flow of money in the economy. We are money experts who do good,” McCall says proudly.
More money, less money problems
With a high unemployment rate among the youth, and much of the population being working class, South Africans do not generally have savings pools to tap into in times of emergency. This inflicts an excessive strain on social services.
The middle class, research has shown, tend to cash in their retirement savings during their careers, much to their detriment of their retirement fund. The earlier one begins saving for retirement, the longer one has to take advantage of the full benefit of compound interest over the years. For this reason the national treasury introduced Tax Free Savings Accounts as from March 1 2015 to build household savings and encourage investment.
July savings month will end, the campaigns and their energy will pass. Utilities and essentials will increase. Will we be prepared with the skills and knowledge to effective deal with the reality we will find ourselves in? It will require integrity and discipline to learn from our own mistakes and the mistakes of others. Being conscious and aware of our surroundings should teach us about frugality and austerity, saving resources, saving money and ourselves in the process.