By Ashleigh Brown, journalist, Justmoney
Paul Roelofese, a certified financial planner from the Financial Planning Institute, does not believe that the new tax-free savings accounts set to be introduced by the government will benefit the majority of the people.
“I believe that the average household is struggling to save, and even if this is an incentive, you have to have the means or the resources to save. So you can have this wonderful vehicle all open and ready, but we know that the average household is spending about 75% of their income on debt.
“So until that is behind them, or in control, I don’t see much left for the average household to put towards savings,” said Roelofese.
The tax-free savings account will assist those clients who are able to save. But Roelofse believes that South African’s are between “a rock and a hard place”, in terms of paying off debt and trying to save more.
When will the tax free account be available?
National Treasury plans to introduce the tax-free savings accounts by 1 March, 2015. The accounts will allow clients to save up to R30 000 annually or R500 000 in a lifetime, in approved savings products – such as a bank fixed deposit, a retail savings bond or a unit trust fund.
All earnings from the accounts are also tax-free. This is in an effort to improve South Africa’s low saving rates, by encouraging households to save more and lower their financial vulnerability.
“Not only is the aggregate level of saving across the economy low, but surveys suggest that the number of adults who do any saving at all is around 42%, with only half of those saving through formal channels,” said National Treasury in a document outlining details of the new tax-free savings account.
Beware of penalties
Clients are allowed to open more than one tax-free savings account, at multiple financial institutions. However, the total across all accounts must not exceed the annual or lifetime limit.
“Individuals will be allowed to open one or two accounts per year, where they may invest in either interest bearing or equity instruments or both types of investments in each account, but total contributions for the tax year may not exceed the annual limit of R30 000,” said National Treasury.
If clients do go over the savings limit they will be penalised by way of a 40% tax feeFor example, if in one savings account has R15000 saved and another has R20000saved, that gives a total of R35000, which is R5000 over the annual limit. A penalty tax of 40% percent on the R5000 will have to be paid.
The excess contributions of the R5000 can remain in the account, and the interest, capital gains and dividends on it will be tax-free.
The penalty should be avoided, as financial institutions should stop clients from investing too much to a single tax-free savings account. Excess contributions will most likely happen when a client has more than one tax-free account across multiple financial institutions.
International model
Capping the amount that can be saved tax free is not a new idea. “The idea of contribution limits is a common characteristic of tax incentivised savings accounts in other countries such as Canada, Ireland and the United Kingdom,” said National Treasury.
The United Kingdom’s Individual Savings Account (ISA) is an account which enjoys a tax-free status. Clients may make withdrawals from the account on request, within 15 days.
The UK also has a Junior Individual Savings Account (JISA) which allow children to start saving from an early age. At the age of 18, a JISA will turn into an ISA account.