With less than two weeks to go, Phumza Macanda, director for media management and communications at National Treasury, says the introduction of tax-free savings accounts is on schedule and final regulations will be published at the end of February.
Rowan Burger, executive for the large corporate segment at Momentum, says providers are still scrambling to figure out exactly what the rules are before drawing up advertising as they do not want to make promises they cannot keep.
With a tax-free account, you can invest up to R30 000 a year, with a lifetime contribution cap of R500 000. All proceeds (interest, capital gains and dividends) are 100% tax-free.
In contrast to pension funds and retirement annuities, contributions to tax-free savings accounts will be made from after-tax money (typically salaries). Interest and capital growth in these accounts will be exempt (also true for pension funds) and withdrawals will be exempt (pension funds withdrawals are taxed).
Burger says one benefit is “tax certainty” – the tax is paid up front; with retirement provision there is always a risk tax laws may have changed by the time you retire.
Burger expects banks will want to attract tax-free savings to solve their liquidity issues. They have to hold capital against their lending and, if they are able to attract longer-term savings money, that reduces the amount of reserves they need to hold against their loan books.
“The banks are going to be very competitive in this space and will probably offer really good rates as a consequence of that because this money is likely to be sticky.”
Asset managers that run unit trust platforms will probably consider offering equity, balanced and money market funds.
For insurance companies tax-free savings accounts offer the opportunity to attract new business and maintain their cost per policy.
Government will also be wrapping re-tail savings bonds in the tax-free savings account.
But what are the benefits for the investor?
To reach the R500 000 limit between the age of 25 and 65, the annual contribution would amount to R12 500.
An investor in the tax-free savings account would be around 40% ahead by age 50 compared to a traditional savings account, Burger says.
“If you roll that forward to 65 all of a sudden that’s 75% (the difference), which is really significant.”
The investor in the tax-free savings account is able to build up a kitty of roughly R2.75 million over his working life, compared with just over R1.5 million in traditional savings, Burger says.