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According to Karin Muller, head of growth market solutions at Sanlam, the main advantage of tax-free savings accounts is that no dividend, capital gains or income tax is payable, as long as contributions remain within an annual threshold amount of R30 000, and a lifetime limit of R500 000. Individual investors will also be able to access their funds at any time.

“Since you won’t pay any tax on the growth on your investment, a tax-free savings account is an effective way to save for your goals. Your money will grow faster than in a regular investment or savings account. It all depends on how long you stay invested, however – the longer you invest the more benefit you will get. Although the tax benefits will be low in the beginning, they will grow over time due to the power of compound interest, or earning investment return on investment return,” Muller says.

Individuals will be able to open multiple tax-free savings accounts with different underlying investments, as long as the annual limit and the lifetime limit of R500 000 is not exceeded. The limit only applies to the money you actually invest.. You’ll be able to withdraw your money at any time, but it is important to remember that if you then decide to replace this money again, it will count towards your annual and lifetime limits.

Tax-free savings accounts or retirement annuities?

Muller says Sanlam is serious about its role to support and encourage savings. “We fully support the objectives of National Treasury with the introduction of tax-free savings accounts. However, it is important that investments in these accounts form part of a holistic financial plan, which takes into account all an individual investor’s financial needs, both short- and long-term.

“A tax-free savings account is an excellent savings solution for longer term savings, such as saving for children’s education. In most cases retirement annuities are more appropriate retirement savings vehicles. This would however depend on your own personal circumstances.” she says.

Although both retirement annuities and tax-free savings accounts earn tax-free investment returns, retirement annuities defer income tax to the post-retirement phase, whereas with tax-free savings accounts income tax is paid before every contribution is made (since you make the payments with after-tax money).

“In the long run, retirement annuities give the same or better value compared to a tax-free savings account when used for retirement saving. It is not just a case of adding up the figures, however – there are a number of other factors to consider when deciding between which savings product to use, such as protection from creditors, estate duty, liquidity and asset allocation. When saving for retirement, retirement annuities remain tops,” she says.

Potential pitfalls of tax-free savings accounts

Even though tax-free savings accounts offer investors a new way to save with many benefits in addition to not paying tax on your investment return like flexibility there are a number of things to consider. Muller advises that before considering an investment in a tax-free savings account, you should take note of the following potential pitfalls:

  • Investing for short periods

    To benefit from the tax relief of investment returns in a tax-free savings account, your investment needs enough time to earn investment returns. “If you invest for a short period, you will not get the tax benefit and will use up some of your lifetime contribution allocation.”
  • Investing more than the annual contribution limit

    Any unused portion of the R30 000 annual contribution limit per tax year may not be rolled over. It’s a case of “use it or lose it”. On the other hand, if the overall payments exceed the annual cap, you will pay a tax penalty of 40% on the excess contributions. A similar penalty will apply on payments in excess of the lifetime limit of R500 000. “Consumers therefore need to be vigilant – if you have multiple tax-free accounts and don’t keep tabs on your annual and lifetime caps, you will be taxed as for a normal investment.”
  • Investing in inappropriate funds

    As with any other savings vehicle, you have to make sure that your investment portfolio is appropriate for your investment horizon and will provide optimal returns at an acceptable level of risk.
To ensure you benefit from a tax-free savings account in the way intended by National Treasury, Muller advises speaking to a professional financial adviser first. “This will also ensure that your savings decisions are aligned with your personal requirements and form part of a well-considered financial plan,” she concludes.

Sanlam tax-free savings products

Sanlam has developed a number of tax-free savings products to support the objectives of National Treasury and to cater for different categories of clients:

Sanlam Tax-free Investments, offered by Sanlam Life

The Sanlam Tax-free Investments product offers people the opportunity to earn tax-free returns on their investment. It is designed to comply with National Treasury’s principles of simplicity and transparency.

There are two tailored investment options:

  • A comprehensive option with the flexibility to make investment fund choices from R500 per month
  • A simplified core option that offers low-cost access to a Satrix lifetime investment option from R300 per month.

To dovetail with National Treasury’s aim of incentivising more individuals to save, Sanlam has also introduced the concept of social savings groups. These enable people to significantly cut the administration charge on their Sanlam Tax-free Investments product by encouraging friends and family to take out their own Sanlam Tax-free Investments product and join their social group. The more people in the social group, the cheaper the administration charge for everyone in the group.

 

Sanlam Investments Tax-free Unit Trust and Satrix Tax-free Unit Trust, offered by Sanlam Investments

The Sanlam Investments Tax-free Unit Trust and the Satrix Tax-free Unit Trust offer all the flexibility and accessibility associated with a unit trust.

Sanlam Investments has made a comprehensive fund range with no performance fees and competitive pricing available for the Sanlam Investments Tax-free Unit Trust. The full range of Satrix funds are also available, offering access to Satrix’s expertise and market index returns with limited deviation from the index. The usual recurring contribution minimums of R200 for Sanlam Investments funds and R500 for Satrix funds apply.

Glacier by Sanlam will also offer a Tax-free Investment Plan granting access to a range of funds on their platform

Sanlam Life Insurance is a licensed financial service provider.
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