If you are looking to put money away for a future nest egg, pay for your dream holiday or contribute to the education of your children, a tax-free investment is the way to go. Tax-free investments were introduced by the government in 2015 as a way to incentivise a greater saving culture among South Africans. All returns on these contributions, be it interest income, capital gains or dividends are exempt from tax.
These investments, also referred to as tax-free saving accounts (TFSA) and paid from post-tax income, can be in the form of fixed deposits, unit trusts (collective investments schemes), retail savings bonds, endowment policies issued by long-term insurers, linked investment products, and exchange traded funds (ETFs) that are classified as collective investment schemes and can be issued by banks, long-term insurers, government, managers in charge of collective investment schemes, mutual banks and cooperative banks.
Payments towards these savings can be made on a monthly, quarterly, half-yearly or annual basis, and single amount contributions are also possible.
According to SARS, the maximum contribution per tax year is R36 000, which increased from R33 000 on 1 March 2020. Any portion of the unused annual limit cannot be carried forward to the following tax year. There is also a lifetime limit of R500 000 per person. The contributions can be spread over various investments as there is no limit to the number of tax-free accounts a person may hold, with the condition that the annual threshold is not exceeded. Any contributions that exceed the maximum limits carry a penalty of 40% on the excess amount. Transfers between different accounts/funds can also be made without being penalised.
Furthermore, it is important to note that opening and contributing to a tax-free savings account in the name of someone else, including a minor, forms part of their lifetime contribution limit of R500 000. For example, if you open an account for your child to provide for future post-school education and their lifetime allowance is reached even before they begin to study, they will be prohibited from any future contributions to their own tax-free investment.
These funds also allow for withdrawals, with varying terms and conditions across the different company offerings. However, it must be noted that maximum benefit is achieved by taking a long-term strategy and limiting withdrawals as far as possible.
In order to get full value out of the tax benefit offered, it makes sense, where possible, to put the maximum allowed annual amount towards these savings. There is of course also the added benefit of compounded growth over time.
When choosing a product, it is advisable to look at the fee structures offered by the different institutions to make sure you get good value for money.
With the AVBOB Family Saver, you can save as little as R200 per month and have the benefit of yearly bonuses, special bonuses, and a discount of up to R4 000 on a funeral*. The AVBOB Family Saver policy has a term of 10 years.
*Benefits only apply if AVBOB Funeral Service conducts the funeral.