I was in two minds whether to write this article criticising the banks for promoting their tax-free savings products for fear of discouraging the act of saving in a country where the savings rate is negative, which means “we don’t save”, but nevertheless read on….
The banks aggressively market their tax-free savings products based on the tax saving, knowing full well that the average tax-free saver is most likely saving no tax, and this is thanks to an annual taxable deductible interest exemption of R 23 800 under the age <65 and R 34 300 if you are 65+.
At current interest rates (c.4%) the exemption means you will only benefit from an interest-bearing tax-free savings account if you have more than R 595 000 invested under < 65 yrs or R 857 500 over 65yrs. If you consider tax free savings account annual contributions are limited to R 36 000 per annum and tax-free savings accounts have only been around for 5 yrs there is no-one with nearly this amount in a tax- free savings account.
Keep in mind the interest from all your investments is aggregated for tax so there will still be a tax benefit if you are earning interest from other investments exceeding the applicable tax exemption.
For Mr. Joe average if you are going to benefit from a tax-free savings investment then I recommend the investment be 100% growth focused, which means an investment in shares and / or property and not an interest- bearing investment.
As a sidenote with interest rates at 50-year lows if you are relying on a bank account to grow your wealth then you are saving yourself poor, as inflation will eat-up most if not all your interest.
Mark Williams
Mcomm, CFP®, HdipTax
T. 021-205 1133
Email. service@mwwealth.co.za
