Monthly Archives: October 2017

May not be gaining anything from a tax free account at a bank

Last month Intellidex released research that showed that a total of R2.57 billion had been invested in tax-free savings accounts (TFSAs) in the first 12 months that they were available. A total of 262 493 accounts were opened over this period, showing that there has been fair uptake of these new products.

The study also noted that an estimated 21{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of these accounts were opened by first time savers. The initiative has therefore had some success in encouraging South Africans to save.

While this was a positive picture, there was an area of concern. That is that 59{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of all TFSAs were opened at banks and the majority of the investments were held in cash.

The problem with this is that it will take years for investors to see any advantage from a TFSA if they are only using it to make a bank deposit. This is because tax payers already receive an interest exemption every year.

Currently this exemption is R23 800 for anyone under the age of 65, and R34 500 for anyone 65 or older. Any tax payer would have to earn interest above that threshold to pay any tax on it.

The best rates currently available on bank deposits in TFSAs are around 9{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}. So for anyone under the age of 65 to earn more than R23 800 a year in interest and therefore benefit from a TFSA, they would need to have R265 000 in their account.

Since you can only invest R30 000 into a TFSA every year, it would take a minimum of around six and a half years to build up that amount, even accounting for compound interest. It is therefore fair to assume that most people who have opened TFSAs at banks are actually not seeing any benefit from them.

As this shows, even once investors reach the point at which they are earning interest above the annual exemption, the benefits will still be very small. They need to have substantially more to see a worthwhile benefit.

The exceptions would be those who are already earning interest above their exemption elsewhere. However, this is certainly a minority of those under the age of 65, although it may be higher amongst pensioners.

In comparison, the benefits of investing in equity or listed property funds are significant.

In the case of equities, there would be immediate savings on the 15{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} dividends withholding tax applied to any distributions from companies. With listed property, the benefits are even greater, as distributions from real estate investment trusts (Reits) are taxed as normal income. For those in the highest tax bracket, this would be 40{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}. Given that the yield on listed property is a significant part of its total return, not having to pay any tax on this is therefore potentially a huge gain.

On top of this, the long term growth from investing in these asset classes is likely to be far higher than from a cash investment. The benefits will therefore accelerate much faster.