After years of monitoring the success of the UK’s Individual Saving Accounts. SA has finally launched it’s version of the ISA, the Tax Free Savings Account (TFSA). Simplistically the product is a tax-free savings vehicle not a retirement plan. In its bid to encourage more saving after the less than exciting roll-out of the SA Retail Savings Bonds, the SA Government has allowed approved financial services product providers to include a myriad of investment options like unit trusts (UT) and exchange traded funds (ETF) within a TFSA offering. Importantly it has allowed investors to invest in UTs which if managed appropriately should increase in value over time while an ETF will have its value determined by the index it is tracking.This is where the TFSA comes into its own. Any increase in the unit price the investor receives will not be liable for the dreaded Capital Gains Tax it would have, in other types of investments. This alone should be a significant incentive for any long-term investor! Tax on any interest earned is also avoided. It’s not often a free lunch is so easily available.
Product providers are however prohibited from including investments attracting any performance fees. This has limited the number of approved UTs from the larger and recently more successful asset managers being included in TFSA products. In addition an investor is only allowed investing a maximum of R30,000 per tax year and a lifetime contribution of R500,000 across all TFSA products irrespective of the number of withdrawals concluded per tax year. Also remember no benefit rollovers are allowed, thus if you don’t use it you lose it. Where possible each family member should have an account opened for them to achieve the maximum lifetime benefit. Based on the UK experience I’m sure the maximum allowable investment per tax year will increase over time and this announcement should be made during the yearly Budget speech of the Minister of Finance.
When selecting a TFSA product amongst other considerations, the following are important clearly not the most important:
- What is the TFSA product cost: what is the service provider charging for the product?
- Selecting an appropriate investment for your specific savings goal: This will inform how much potential losses you can stomach over time.
- What is the underlying investment cost be it a UT or ETF like Satrix: If not specified, who is paying for it and where is it charged?
If the right investment choices are made within a TFSA, significant long term benefits should accrue.