Making sense of tax-free savings and investment


Finance Minister Tito Mboweni’s budget speech is fast approaching. Arguably, unlike in other years, taxpayers are paying closer attention to developments this year due to the funding challenges that the fiscus is facing and how this will impact on the tax base.  

Tax-free savings options were introduced in 2015 and provided taxpayers with a unique vehicle to save and grow tax-free earnings.  As the tax year draws to a close, now is the time to consider whether you have made the maximum allowable contribution to your tax-free investment (TFI). Those who don’t yet hold a TFI, but are sitting on additional money to save, can open one now and earn tax-free returns for the duration of their investment. 

Thandi Ngwane, head of distribution at Standard Bank wealth, investments and acquisitions and Tshiamo Molanda, head of client solutions, everyday banking at Standard Bank personal and business banking South Africa

Know your limits

Tax-free savings vehicles were launched in a bid to encourage South Africans to save more. These accounts allow for individuals to contribute up to a certain limit, in this case R33 000, 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 your lifetime. Limits have been set by government on TFI accounts, which 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 over a long period to allow for compounding of interest to take place.

It is important to note that once you withdraw funds from your tax-free account, you cannot replace the funds without impacting both your annual limit of R33000 and your lifetime limit of R500 000; for example, if you deposit R33 000 and withdraw R10 000, you should not add R10 000 again, as the total contributions will exceed R33 000. If you deposit R20 000 and withdraw R10 000, you can contribute another R13 000, as the total contributions will not exceed R33 000.

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 (RA), for example, you can invest the extra funds into a TFI to avoid being taxed on the additional contributions to your RA.  

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.  

Keep in mind over-contributions

Over-contributing can lead to exceeding your annual contributions, which can lead to a penalty tax of 40%. For example, if in one tax year, a consumer invests R10 000 in an account with one provider and R30 000 in an account with another provider, she will have contributed R10 000 more than the annual limit. She will then be required to pay 40% tax on the excess R10 000 she has invested.

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 Standard 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.  

Standard Bank also offers a tax-free call account where you can start saving from R250, allowing you to get all the money you have invested returned to you without incurring any tax deductions when withdrawing, leaving you to enjoy every cent you have saved up the way you deserve.

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.

Thandi Ngwane is head of distribution at Standard Bank wealth, investments and acquisitions and Tshiamo Molanda is head of client solutions, everyday banking at Standard Bank personal and business banking South Africa 

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