There are two certainties in life, death and taxes. The South African government has given you a pass on one of these, and it is not death. History shows, by proactively investing in a Tax-Free Savings Account on 1 March each year instead of waiting for the tax year end, one could be R181 000 (37%) better off. On 1 March 2015, the South African government introduced a new savings vehicle that aimed to incentivise saving outside of the regular retirement savings route. The Tax-Free Savings Account (TFSA) allows investors to maximise tax relief on their investments. All proceeds from the investments in a TFSA, including interest income, capital gains and dividends, are exempt from tax. In 2015, the annual contribution limit was set at R30 000 whilst the lifetime contribution was limited to R500 000. This was then adjusted to R33 000 per annum in March 2017, with no change to the R500 000 lifetime limit. At the current parameters, one could maximise the contribution rate for a period of just over 15 years before reaching the lifetime limit. For individuals proactive and fortunate enough to have begun investing in 2015 in a TFSA, they could have contributed R159 000 to 29 February 2020. To use an example of a family of four, this equates to R636 000 of after-tax contributions from 2015 to the end of February 2020 that are compounding tax free. When considering the various savings avenues, some serious considerations are returns, costs, tax and liquidity. A TFSA investment option ticks all these boxes and makes sense as a first port of call for individuals trying to save for their future.
- One can access a wide variety of asset classes and investment strategies via TFSA unit trusts provided by the asset management industry.
- The gains, interest and dividends generated by the investments are not subject to tax.
- One may withdraw from the tax-free investment at any time, up to any amount.
- TFSA investments may not levy performance fees and therefore any outperformance by the investment is retained (untaxed) excluding the flat management fee.
- There is no carry over of your annual allowance into the following year. By way of example, if one did not make any TFSA investment in the tax year ending 28 February 2019, they could not carry the R33 000 allowance into the 2020 tax year. You remain limited to the R33 000 per annum until reaching the lifetime limit of R500 000.
- Any withdrawals made from a TFSA cannot be replenished. If you have contributed the R150 000 to date and choose to withdraw R100 000, your overall lifetime limit will then drop to R400 000.
- Contributing in excess of the annual R33 000 and lifetime limit R500 000 will result in penalties. TFSA is not targeted at the top earners in South Africa.
- For younger investors, a TFSA allows one to invest tax effectively in a liquid investment vehicle towards a future event. This may include buying a house or affording a wedding.
- Unlike retirement savings, TFSA is not subject to Regulation 28, allowing one to invest more aggressively in equities or at higher offshore exposures than the 30% offshore plus 10% in Africa.
- Should one’s investment strategy or objective change, switches between TFSA unit trusts may be made without triggering a CGT event (introduced in 1 March 2018). There is no limit on the number of tax-free accounts one can have.
- Down the line, in retirement, drawing down on one’s TFSA account can be used to offset the withdrawals needed from a living annuity. This will result in an overall tax saving until such time as the TFSA is depleted.
*Performance for the month of February 2020 is estimated at 1.0%.In the above example, simply by investing early, one could have been ahead by 37% or R 181 000! At Laurium, we offer all of our long only funds on a TFSA basis, at a flat fee. This includes our recently launched Africa Bond USD Prescient Fund which targets high yields in USD at moderate volatility. Please see the Laurium Funds listed below.
- Laurium Equity Prescient Fund
- Laurium Flexible Prescient Fund
- Laurium Income Prescient Fund
- Laurium Africa Bond USD Prescient Fund
- Laurium Stable Prescient Fund
- Laurium Balanced Prescient Fund