Personal finance: Maximise your savings with a tax free savings account

Tax-free savings accounts do what the name says – and as they do not carry any tax charges, you’ll get a higher return.

© Copyright (c) Daily Maverick , All Rights Reserved

First published in the Daily Maverick 168 weekly newspaper.

One positive side-effect of the Covid-19 pandemic has been an increased awareness of the importance of saving. This is reflected by the fact that South Africans in a position to do so, are now saving more than before.

According to Statistics SA, the household saving rate increased to 0.7% in the first quarter of this year, up from 0.5% in the fourth quarter of 2020. Although this is not a huge increase, the upward move is encouraging, particularly since the national rate previously showed a downward trend.

In a bid to encourage savings, the government introduced tax-free savings accounts (TFSAs) in March 2015. You are allowed to contribute a maximum of R36,000 a year and R500,000 over your lifetime to tax-free savings accounts. The capped amounts only refer to your capital contributions and do not include the growth on your investments.

These savings vehicles do not carry any tax charges and consumers are starting to shift their savings into TFSAs in recognition of their benefits.

“With a TFSA, the entire growth is tax free, which means you typically will get a higher return in a tax-free savings account than a taxed savings account assuming the same underlying assets,” explains Marius Pretorius, head of marketing: retail savings and income for Old Mutual. “On the other hand, taxed savings accounts are exposed to a variety of taxes such as dividend withholding tax and tax on interest. This means that before you benefit from the return, tax will have to be deducted.”

The main advantage of TFSAs lies in their flexibility. You can contribute a once-off sum or make recurring contributions and you pay no tax on the growth of your investment.

Although they are called TFSAs, these accounts can include fixed deposits, unit trusts, retail savings bonds, linked investment products, exchange-traded funds (ETFs) and even endowment policies issued by long-term insurers.

Although you can withdraw from a TFSA at any time, Pretorius warns that they should not be viewed as short-term investments.

The frequency or timing of any withdrawals will depend on the type of TFSA you invest in. For example, if it is a 32-day fixed deposit account, you will have to give the financial services provider 32 days’ notice.

Products can also be a bit more complicated. For example, Allan Gray offers a unit trust-based TFSA that is structured as a life policy. When you die, the benefit can be paid immediately to your appointed beneficiaries and there are no executor fees. The value of the investment, however, will be included in your estate for the calculation of estate duty.

You can choose from an underlying unit trust or trusts from the Allan Gray Tax-Free Investment Fund list, which includes the Allan Gray Money Market Fund and the Allan Gray Tax-Free Balanced Fund, and a selection of unit trusts from other investment managers. Returns depend on the underlying unit trust selection.

“It is important to distinguish between the TFSA, which can be seen as the product wrapper, and the underlying unit trusts, which will generate the returns,” says Shaun Duddy, senior manager in product development at Allan Gray.

Glenn Grimley, head of Stash at Liberty, points out that if you withdraw from a TFSA, it does not “free up” the annual or lifetime limit for additional contributions.

“For example, if you have contributed R36,000 for the year by October, you will have reached your annual contribution limit. If you withdraw R10,000 in November, it doesn’t adjust your limit. You are still deemed to have made your annual contribution and you will be taxed at a rate of 40% if you make any additional contributions in that year,” he says.

Although financial service providers have alerts to let you know when you are nearing your contribution limits, it is important to remember that they do not have oversight of any other TFSAs you may have.

For example, if you have saved R18,000 in your Allan Gray TFSA, your statement will show that you are still able to contribute another R18,000. But you might also have saved R10,000 in an FNB TFSA, in which case you can only contribute another R8,000 for the year.

If you have multiple TFSA accounts, you need to keep a very careful eye on contributions to avoid paying 40% tax on any excess contributions.

Can you pass on TFSA benefits?

To answer this, DM168 posed a question to financial service providers: Mary has saved R300,000 in a TFSA. On her death, it goes into a testamentary trust for her son Michael, now aged 24. Mary also opened a TFSA for Michael in his name when he was 14 and so his contributions are now at R330,000. Does Mary’s R300,000 go to Michael tax free?

Johan Strydom, growth head at FNB Fiduciary, says Mary’s TFSA will form part of her estate and estate duty of 20% will be levied on it.

“After the estate has been wound up and all tax paid on the estate, Michael will receive the remaining benefit in Mary’s TFSA as a monetary amount via her will. So, other than the estate duty, no tax is payable on Mary’s TFSA benefit when it is paid over to Michael.

“Michael will still have a balance of R330,000 in his own personal TFSA. He can now contribute the money from Mary’s estate to his TFSA should he wish to but would have to abide by the R36,000 maximum annual contribution and the R500,000 total capital threshold,” he says.

Pretorius agrees, noting that Michael cannot add the full R300,000 to his TFSA as this would exceed the TFSA contribution limits and he would have to pay 40% tax on the amount exceeding the limits. “Note that the penalty for over-contribution is calculated each tax year and not at the end of the ‘lifetime’ limit,” he adds. DM168

Next week: Performance returns on different TFSAs and where you can invest.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

© Provided by Daily Maverick

Internet Explorer Channel Network
News Related

OTHER NEWS

Sam Burgess CLEARED by cops after ex-wife Phoebe accused him violence

© Provided by Daily Mail MailOnline logo Police have cleared Sam Burgess of any wrongdoing after a year-long investigation sparked by allegations of domestic abuse made by his ex-wife Phoebe.  ... Read more »

Cricket-Former Australia batsman Slater arrested after domestic incident - reports

MELBOURNE (Reuters) – Former Australia batsman Michael Slater has been arrested in Sydney after a domestic violence incident, Australian media reported on Wednesday. Slater’s manager Sean Anderson declined to comment ... Read more »

‘Confusing rules will lose us a small fortune' – pub and club owners say relaxed rules still unworkable

The welcome news for nightclubs and late bars that restrictions on opening hours will be lifted on Friday is tinged with uncertainty, as many still have challenges to overcome before ... Read more »

WA Police to revisit shacks in Cleo search

Police investigating the disappearance of missing four-year-old Cleo Smith will carry out fresh searches of shacks near the family’s West Australian campsite. © James Carmody/AAP PHOTOS The search for missing ... Read more »

Country set to endure another winter of restrictions despite our new freedoms

The country will be forced to endure another winter of Covid-19 restrictions after the Government postponed plans to ease the remaining public health measures on Friday. Strict rules for indoor ... Read more »

‘Pigs shouldn't fly' – animal activists call for U-turn on deal to fly live animals to China

Animal welfare protesters have told the Government pigs should not fly. Activists were joined by a number of celebrities and animal welfare experts, who said a recent deal to export ... Read more »

When planets collide: Galway astronomer detects huge impact that stripped away atmosphere

A massive collision be- tween Earth-sized planets in a nearby star system that stripped their atmospheres has been detected by a Galway-based astronomer. Astronomers interested in understanding how planets form ... Read more »

Grafton Street shop wants €500,000 rent cut over Covid closure

The operator of a Grafton Street footwear and clothing store is asking the High Court to declare it has no liability for more than €500,000 in rent during 253 days ... Read more »

Change in testing of close contacts will see rapid antigen tests sent out to homes

Around two million DIY home Covid-19 tests are ready to be rolled out for the first time by the HSE in the coming months to people who have been at ... Read more »

‘High rate' of hurlers playing after suspected concussion

An “unacceptably high rate” of inter-county hurlers suspected of having sustained concussion during a game are allowed to resume play without adequate assessment, according to a new medical study. An ... Read more »

Willy Wonka Songwriter Leslie Bricusse Dead at 90, Joan Collins Pays Tribute

Leslie Bricusse, the two-time Academy Award-winning songwriter and lyricist, has died. © Provided by People Gary Gershoff/WireImage The Hollywood veteran, whose credits include Willy Wonka and the Chocolate Factory and ... Read more »

Adam Schiff says he 'vehemently disagrees' with AG Merrick Garland's reticence to investigate Trump

© Jim Lo Scalzo/Pool via AP Rep. Adam Schiff, D-Calif., pauses as he speaks during the House select committee hearing on the Jan. 6 attack on Capitol Hill in Washington, ... Read more »

Jason Momoa Reveals He Injured Himself Multiple Times While Filming ‘Aquaman 2': “I'm Just Getting Beat Up”

© Michael Rozman/Warner Bros. Jason Momoa on ‘Ellen DeGeneres Show’ During Monday’s episode of The Ellen DeGeneres Show, Jason Momoa shared some rough behind-the-scenes details about injuries he suffered while ... Read more »

Barkov breaks tie in 3rd, Panthers defeat Lightning 4-1

TAMPA, Fla. (AP) — Aleksander Barkov scored the go-ahead goal 3:40 into the third period and the Florida Panthers won their third straight game by beating the Tampa Bay Lightning ... Read more »

Devils deal Kraken 4-2 loss ahead of Seattle's home opener

NEWARK, N.J. (AP) — Rookie Dawson Mercer and Damon Severson scored first-period goals and Jonathan Bernier made 27 saves, leading the New Jersey Devils to a 4-2 win over the ... Read more »

Local chronic pain sufferer desperate to find new doc

For 12 years Blair Gehring has been taking prescription narcotics to manage his chronic pain. When his physician, Dr. Ian Gebhardt, was charged on Oct. 5 with sexual assault for ... Read more »

Long-term report: A fond farewell to the incredibly capable Ford Focus ST

As farewells go, this one has been hard – so much so I’ve been avoiding it like root canal surgery. My colleagues have been telling me Ford has been desperate ... Read more »

UK launches £5,000 heat pump grants as part of homes decarbonisation drive

Business and energy secretary Kwasi Kwarteng: ‘Recent volatile global gas prices have highlighted the need to double down on our efforts to reduce Britain’s reliance on fossil fuels.’ Photo: PA ... Read more »

PSG v RB Leipzig: Messi is settled in and ready to fire, says Pochettino

Paris Saint-Germain boss Mauricio Pochettino declared Lionel Messi fully settled into life in the French capital after his high- profile move from Barcelona during the summer. The 34-year-old Argentine spent ... Read more »

Yankees forced to make hard Gleyber Torres, Gary Sanchez decisions

Gleyber Torres is out at shortstop and Gary Sanchez’s future is uncertain behind the plate. Instead of being trusted parts of the Yankees’ core, both will be under scrutiny, with ... Read more »

Garena Free Fire Redeem Codes for October 20, 2021: How to redeem the codes

Garena Free Fire Redeem Codes for October 20, 2021: How to redeem the codes Garena Free Fire is an action-adventure battle royal game where players enter the battlefield with only ... Read more »

Taliban calls suicide bombers ‘heroes of Islam', promise rewards to their families

© Provided by DNA A few months after the takeover of Afghanistan, the Taliban has made yet another shocking statement that has made headlines. This time, the group has shown ... Read more »

India to urge oil exporters to raise crude output for price relief at CERA Week

In the upcoming international energy event scheduled later this week, India will reiterate its request to oil producing countries to increase their output which will bring down global crude prices, ... Read more »

Power projects having less than 4-day coal stock reduced from 69 to 58

The coal stock situation at thermal power projects has improved further as the number of non-pit head projects having less than four days of coal (supercritical stock) reduced to 58 ... Read more »

CISCE postpones ICSE, ISC 2021-2022 semester 1 exams, check official notice here

© Provided by Zee News New Delhi: The Council for Indian School Certificate Examination (CISCE) on Tuesday (October 19, 2021) announced the postponement of the ICSE and ISC 2021-2022 semester ... Read more »

Char Dham Yatra, halted due to heavy rainfall in Uttarakhand, to resume from today

© Provided by Zee News Nainital: The ‘Char Dham Yatra’ which was halted due to incessant rainfall across Uttarakhand, will resume from Wednesday. After attending a review meeting with the ... Read more »

India's mineral production rises by 24% in August 2021

The index of mineral production of mining and quarrying sector for August stood at 103.8, which was 23.6 per cent higher as compared to the year-ago month, the mines ministry ... Read more »

North Korea test launches submarine-launched ballistic missile, 8th this year

© Provided by Zee News Seoul: North Korea said on Wednesday that it has “successfully” conducted a test-firing of a new-type of submarine-launched ballistic missile (SLBM) a day earlier. It ... Read more »

India-China trade may exceed record $ 100 billion-mark this year

The India-China trade volume looks set to cross the record figure of $ 100 billion this year as the total has already touched $ 90 billion in the first nine ... Read more »

Kerala Lottery result today 20.10.202. Check Akshaya AK 520 winner list

Kerala State Lotteries is a lottery programme run by the Government of Kerala. It was established in 1967, under the lottery department of the Government of Kerala, it is the ... Read more »

Kojagiri Lakshmi Puja 2021: WhatsApp messages, Facebook greetings and status on Lokkhi Pujo

© Provided by DNA Sharad Purnima, also known as Kumara Purnima or Kojagiri or Kojagori Purnima, is one of the most significant Purnima or Full Moon nights for Hindus and ... Read more »

Telangana: YS Sharmila to begin record-breaking 4000-km foot march today

© Provided by Hindustan Times YSR Telangana Party president YS Sharmila will embark on a padayatra across Telangana, following the footsteps of father YSR and brother YS Jagan Mohan Reddy.  (File Photo) ... Read more »

While Centre Urges People to Follow Protocol, Stop Covid Burst, UP Govt Plans Diwali Melas in all Cities

© Provided by News18 While Centre Urges People to Follow Protocol, Stop Covid Burst, UP Govt Plans Diwali Melas in all Cities The Centre is cautioning people against assembling in ... Read more »

PM Modi to attend Abhidhamma Day programme in UP's Kushinagar today

© Provided by DNA Prime Minister Narendra Modi will participate in an event marking Abhidhamma Day at the Mahaparinirvana Temple in Uttar Pradesh’s Kushinagar on the auspicious occasion of Ashwin ... Read more »

Democrats abandon free community college as White House warns social safety net bill will shrink below $2T

WASHINGTON — President Biden told progressive lawmakers on Tuesday that the final social spending bill is expected to drop tuition-free community college and curtail the child tax credit program, two ... Read more »

Timebends: how the new world of work can help us conquer time

Since the advent of industrial society, the ticking of the clock has governed the world of work. We set an alarm to wake up, we clock in, we clock out, ... Read more »

Man files notice of lawsuit against NAPD officer, department

Oct. 19—FLOYD COUNTY — A Corydon man investigators say was wrongly charged after a New Albany police officer is said to have planted drugs on him is preparing to take ... Read more »

Tesco tech play: Supermarket giant launches checkout-free GetGo store in London

Tesco tech play: Supermarket giant launches checkout-free GetGo store in London Tesco, the UK’s largest supermarket chain, has launched its first checkout-free store to the public in London’s High Holborn. ... Read more »

Dying Young From Heart Disease: Where You Live in the U.S. Matters

© Provided by HealthDay TUESDAY, Oct. 19, 2021 (HealthDay News) — People who live in disadvantaged parts of the United States are nearly twice as likely to die young from ... Read more »

Twilight's Ashley Greene And Kellan Lutz Reunited To Play The Cullens Again, And Now We're Bloodthirsty For More

© Provided by CinemaBlend Kellan Lutz and Ashley Greene as Emmett and Alice Cullen in Twilight baseball scene It looks like another thunderstorm just stopped by in Forks, Washington because ... Read more »