South Africa has a low savings rate and this has serious consequences for the potential economic growth of the country. A low savings rate means that not enough money is available for investment in projects which will result in increased employment, infrastructure expenditure and ultimately the growth of the economy as a whole.
South Africa has a low savings rate and this has serious consequences for the potential economic growth of the country. A low savings rate means that not enough money is available for investment in projects which will result in increased employment, infrastructure expenditure and ultimately the growth of the economy as a whole.
From an individual perspective, it is crucial for people to save while they are economically active in order to secure a comfortable retirement.
Individuals who do not save enough for their retirement will have to rely on others and on the government to make funds available through old age grants and pensions in order to survive.
The government has taken a small step in the right direction to address the problem of the low savings rate by introducing tax-free savings accounts.
From 1 March this year, individual investors will each be able to contribute R30 000 per annum to tax-free savings accounts (R2 500 a month).
The lifetime capital contribution will be capped at R500 000.
The main advantage is that all growth in this investment will be completely free of interest, dividends and capital gains tax.
The drain that these taxes can potentially have on the ultimate value of an investment is substantial.
For example, Old Mutual compared the value of R2 500 per month invested over the past 200 months in a tax-free unit trust to the same amount invested in the equivalent product where the above-mentioned taxes were applicable.
A person who invested in the tax-free product would have been better off to the tune of approximately R1 million.
Financial institutions have started to aggressively advertise their products and it will not be long before individuals are faced with a bewildering choice of alternatives in which to invest.
These will include collective investment schemes – effectively unit trusts and exchange traded funds, endowment contracts and money market or fixed deposit products.
Investors will be able to invest in accounts which earn interest only or in growth assets (such as equities and listed property) which are more likely to outperform inflation over the long term.
Choosing the right investment product or combination thereof would depend on a number of factors, including the individual’s age, risk profile and financial circumstances.
For investors wishing to save, there is definitely a place for a tax-free investment in a well-constructed portfolio of investments, together with other tax-efficient products such as retirement annuities.
It makes little sense to invest in products that attract tax when equivalent tax-free alternatives are available.
Investors with children should consider investing funds on behalf of their children in tax-free investments if finances permit.
Individuals who remain invested over the long term and who resist the urge to cash out of these funds will reap significant rewards.
At a time when personal taxes have just been increased, it is good to know that there are ways to invest where taxes do not erode the value of the investment.
Rands and Sense is a monthly column, written by Ross Marriner, an accounting and tax practitioner and Certified Financial Planner®
