Transfers of tax-free savings accounts take effect

Since March 1, 2018, investors in tax-free savings accounts (TFSAs) can transfer accounts directly between product providers for the first time without affecting their annual or lifetime contribution limits.

The move may stimulate competition in a market, which has thus far been dominated by cash-type investments.

National Treasury first introduced the regulatory framework for TFSAs in 2015 by providing a tax-free wrapper that investors could utilise for investments in various asset classes by opening accounts with banks, asset managers, life insurers and stock-brokers. No changes were made to the regulatory framework during the budget in February and investors are still allowed to invest up to R33 000 per annum in one or more TFSAs (collectively) up to a maximum of R500 000 over their lifetime. All the investment returns earned in the accounts are 100% tax-free.

Previously, investors would only have been able to switch service providers by cashing in their investment and moving it to another provider, but this was classified as a “new contribution” and by doing so, investors would have “forfeited” a portion of their lifetime (and potentially annual) contribution limit.

In order for a valid transfer to happen, investors must recognise that they cannot take the money out of the account and deposit it into a new one, Chris Axelson, director for personal income taxes and saving at the National Treasury, says.

“The transfer has to be done by the institution.”

In other words, where someone cashes out an investment of R33 000 in the same tax year in which it was made, and deposits it into a new TFSA, the R33 000 will still be considered a new contribution. As a result, the investor will exceed the annual limit by R33 000 and a 40% penalty will apply. Investors have to ensure that they fill in the relevant forms to enable a direct transfer between providers.

Landscape

Research conducted by Intellidex shows that more than 207 000 new TFSAs were opened in the 2017 tax year. Cash-type TFSAs at banks continue to dominate the market.

“The major asset class held in TFSAs is in the form of cash at just over 47% (from 51% the previous year), followed closely by equities, which rose from 36% to 40%. This is causing some consternation in that interest rates are low, so real returns are negligible or even negative,” the research report notes.

Treasury really hopes that with the new ability to transfer, people will now be able to put a lot more pressure on institutions to get good offerings, Axelson says.

Where an institution is offering a very low interest rate on the TFSA, investors would now for the first time be able to transfer their account to a provider that offers a better rate, he adds.

Treasury hopes that this will help entice institutions to offer fixed-term deposits with higher rates of return within the tax-free wrapper.

Since the introduction of TFSAs in 2015, the annual interest exemption (R23 800 for individuals younger than 65 and R34 500 for people 65 and older) has remained unchanged and is slowly but surely being eroded by inflation. As a result, it seems that there is a significant demand for TFSAs from pensioners in particular, who wish to increase their tax-free interest income.

“We are hoping that that [the transfer process] will help [with obtaining a higher return]… It does take a while for people to understand that it is not just about deposit accounts or savings accounts.”

Investors can also invest in collective investment schemes (unit trusts and exchange-traded funds) and diversified equity instruments to try and get better growth over the long term, Axelson adds.

“These really are medium- to long-term products for savings.”

Elize Botha, managing director at Old Mutual Unit Trusts, says the benefit of a tax-free investment is greater if the investment is in a fund which has exposure to growth assets, such as equities than one holding cash or bonds, as the South African Revenue Service already provides an interest income exemption.

“The benefit, however, of this regulatory change which allows investors to transfer between providers, is that the investor will no longer be penalised by using up their annual or lifetime limits.”

Botha says the transfer process has been part of the regulations from the outset, but Treasury delayed implementation to allow service providers time to set up systems to enable such transfers.

“From March 1, 2018, only service providers who can facilitate such transfers are allowed to sell these types of products.”

Old Mutual Unit Trusts is ready to facilitate the transfers, she adds.

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