31 July 2024
SAVINGS
Unlocking the true value of TFSAs for South Africans
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outh Africa’s national savings rate fell to 14% in 2023. The country has one of the world’s worst savings rates compared to its emerging market peers. This has an inevitable knock-on effect, with the Financial Sector Conduct Authority (FSCA) finding that 90% of the population cannot continue the same standard of living in retirement. In the current high-inflation, high-interest cycle, financial advisers have a pivotal role to play in helping clients to save – and invest – what they can. Duma Mxenge, Head of Business and Market Development at Satrix, advocates making Tax-Free Savings Accounts* (TFSA) a cornerstone of South Africans’ savings strategies, given that they offer tax-free growth on investments, dividends, and interest earned. “We need to shift our local savings culture to a mindset that every cent saved matters.
Duma Mxenge, Head of Business and Market Development at Satrix
We want to empower our populace to ‘sweat’ their savings to work harder, by investing these with a longer-term horizon. Regular contributions of small amounts add up. TFSAs are flexible, with tax advantages from the get-go – whether you are investing R100 or the full R36 000 yearly allowance upfront.” TFSAs need a rebrand Mxenge stresses that advisers can show their clients that TFSAs can open up a world of investing options. “You are the custodians of client relationships; you know each client’s risk tolerance and time horizons. TFSAs assist you to build a diversified portfolio of assets around your client’s needs, often at comparably lower costs. From exchange-traded funds (ETFs) to high-yield savings accounts for shorter-term savings, there are a wealth of options to align with different budgets and financial goals.” While TFSAs have traditionally been ‘sold’ to South Africans as savings vehicles, they need a ‘rebrand’ as robust investment tools. Mxenge adds, “Ideally, the true purpose of a TFSA should be
long-term investing to earn returns to supplement people’s retirement savings. As the allowance is capped at R36 000 per year, with a lifetime limit of R500 0000, people can often afford to take on more aggressive, highreturn investments. The limits protect individuals from heavy losses, while all ‘wins’ have zero tax liabilities.” Here are some strategic methods to encourage clients’ TFSA savings: 1. Emphasise the investing aspect: Help clients to fully appreciate the TFSA as a robust investing tool, rather than simply as a savings vehicle. Build a unique, diversified portfolio around the client’s goals and timelines. 2. Help clients to automate contributions: Implement automatic transfers to ensure consistent contributions. 3. Budget prudently: Help clients to prioritise savings in their financial plans, allocating a portion of income before discretionary spending. This may mean shifting mindsets from simply being in survival mode to adopting a longer-term outlook. 4. Start small, scale up: Assist clients
to begin with modest contributions if necessary, and progressively increase them over time. Show how even small contributions can grow, given the magic of compound interest. 5. Encourage clients to stay the course: It's crucial to emphasise that a TFSA is not an emergency fund. Your TFSA doesn’t just benefit from the power of compound interest over time, it also benefits from tax savings. 6. Showcase the simplicity: Demonstrate how simple it is to move funds to the SatrixNOW platform and allocate these across the various vehicles – equities, bonds, balanced funds, index-tracking ETFs – that will make their money work harder for them. By embarking on a strategic investing journey today, clients can unlock the full potential of their TFSA, paving the way for long-term financial prosperity. *Tax-Free Savings Accounts: Annual limit of R36 000, lifetime limit of R500 000, 40% tax penalty applicable for contributions above the limit, per individual. For more information visit https://satrix.co.za/tax-freeinvestments
Disclaimer: Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
Tax-free saving this Savings Month BY JANÉL KING AJM, Senior Associate
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avings month is upon us, and what better way to kickstart it than by exploring the tax-free saving options available on the market and their benefits? Tax-free saving is a benefit available to South African residents. Originally created to promote a better saving culture in our country, it is now an internationally recognised savings and investment vehicle referred to as the Tax-Free Savings Account (TFSA). You may contribute a maximum of R36 000 per year to your TFSA, limited to R500 000 in your lifetime. Any contribution more than these amounts will incur tax at a rate of 40%. TFSAs are powerful tools for aiding retirement savings and should be utilised from a young age. If you contribute the maximum yearly amount, you will reach your lifetime threshold within a mere 14 years, after which compound interest, the world’s eighth wonder, will be your best friend. All interest, capital gains, and dividends earned from these contributions are taxfree (if it is contributed within the limits).
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In my view, this is the greatest benefit of a TFSA because the growth obtained from compound interest does not attract tax when you cash out your funds. A TFSA should be treated as a longterm investment since withdrawals cannot be reversed and will not increase your yearly or lifetime limits again. Withdrawing funds from your TFSA reduces the capital in your fund and the potential tax-free growth thereof. For example, if you save R36 000 in year one and withdraw the funds and its growth in year two, your remaining lifetime contribution limit is now R464 000, and you have no capital saved. TFSA should, therefore, be your last resort when you require funds for a rainy day. There are various types of TFSAs, such as unit trust funds (structured as a collective investment scheme), ETFs, fixed deposits and bank TFSAs. The best way to choose which type of product to invest in is to determine your objective. A long-term approach, such as aiding your retirement savings, will benefit
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more from an asset with a higher-growth target, such as unit trusts or ETFs, which have exposure to various shares and properties. If your goal is to save tax, a higher growth-yielding asset is also a good option, as it will result in a larger cash-out in the end. If your goal is a shorter investment with a low-risk profile, a cash investment through a bank TFSA will be more beneficial. This option also allows you to make numerous small contributions, as it does not require a minimum contribution amount like unit trust funds and ETFs. However, it will not be favourable for a long-term approach as the growth will underperform against inflation. Here's an example: A 25-year-old contributes R3 000 pm (which will add up to the maximum yearly contribution cap) to a high-growth portfolio, such as an ETF or unit trust fund. By the age of 39, this individual will have reached their lifetime maximum contribution of R500 000, whereafter they leave their capital in the TFSA rather than withdrawing it. At
retirement (65 years of age), the capital will be about R15,5m (assuming the portfolio has a growth target of CPI + 5%). The withdrawal of this amount at retirement will not incur any dividends or capital gains tax. From a practical perspective, it is most beneficial to utilise each year's maximum threshold of R36 000, as this would enable you to start growing the funds in your TFSA as quickly as possible and utilise the benefit of its compound interest. This could be done with monthly contributions of R3 000 or variable monthly contributions according to your cash-flow abilities and a lump sum at year-end with a salary bonus. The yearly timeline runs from 1 March to 28 February each year. If you are to leave South Africa, the best option is to dispose of your TFSA, as such an investment is only tax-free for South African residents. It is then favourable to obtain a TFSA product in your new country of residence if they have such an option.