With a myriad of tax-free savings vehicles available to investors, choosing the right one can become complex. Understanding the basic principles of these investment products, as well as your personal investment goals, will help you make the right choice.
The introduction of Tax-Free Savings Accounts (TFSAs) in 2015 was widely welcomed for its simplicity and lower cost. In the almost four years since the introduction of this savings instrument, the number of products and investment choices available to taxpayers has grown exponentially.
But choosing the right product, and more importantly, the underlying funds or assets, can be extremely daunting.
TFSAs offer tax-free growth on investments in the account (no tax on dividends, capital gains, interest income or tax charges on withdrawal), savings can be done through lump sums or monthly investments, and investors can access the investments at any time.
Investment and tax experts, however, agree that these investment instruments should be treated as medium to long-term investment vehicles to fully enjoy the tax benefit. The purpose of any investment is to get growth, whether you invest for your retirement, the education of your children, a dream holiday or the deposit on a family home, says Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT).
Investments should never be driven by the tax-free benefit. “First think about the purpose for your saving. The purpose is obviously to get growth – and only then do you consider which vehicle is more tax efficient.”
The basic principles with any investment are to consider the effective annual cost of the product, choosing the option that suits your investment time horizon and to go with an institution you already have a relationship with, or whom you know you can trust.
The offering
Tax-free saving investment vehicles are regulated by the Financial Sector Conduct Authority (FSCA) and National Treasury. Performance fees and exit penalties are a no-no and administration and management fees must be reasonable.
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