Tax Free savers … they were all the buzz when they were first launched, but very few companies marketed them properly or offered the right products to encourage clients to make use of tax free savers. Even worse is that they are poorly understood products and badly sold. So what exactly is the point of a tax free saver and who should use it?
To start with, we need to understand why the Government created this product and what it is supposed to be used for. The idea is that every person in South Africa should be contributing to some form of Retirement vehicle; be it a Pension Fund, Provident Fund and or a Retirement Annuity. Unfortunately for most, this isn’t the case. However, if you are, you will know that when you get to retirement you are able to take 1/3 of your retirement savings from a Pension Fund or a Retirement Annuity as a cash lump sum. Most people jump at this especially since the first R500 000 of that lump sum is taxed at zero.
However, this means that the remaining money which is used towards their retirement income going forward has been decreased and more often than not is not sufficient to live off. In the case of a Provident fund it gets even worse as most people take the full savings amount as a lump sum in cash, even though the taxes are high. So the idea of the tax free saver was born.
If the government could get people to stop withdrawing their savings at retirement, then they would have more money and will not become a burden of the state, which has become the norm, not the exception. A tax free saver is a savings product which allows you to save up to R550 000 over your life time and then withdraw this money when you need it without paying capital gains tax. So basically it meets that first R500 000 taxed at zero amount. What makes it even more advantageous is that you are not bound by the retirement laws which restrict you to only 75% in equities and 25% offshore. Here the choice of funds and companies and the risk of this choice is yours. You can go 100% offshore if that is your risk profile and the investment goal you have set.
But, they did add a few restrictions … You can’t save more than R2 750 per month or R33 000 per year and as mentioned it is limited to R550 000 over your life time. Also if you withdraw from your fund you can’t put the money back in again. Hmm, that sounds a bit complicated, so here is a better example: Say you have saved R400 000 in your tax free saver, but you get into financial difficulty and withdraw R300 000 of that money, you may not put the money back into your account. You can top the account up with the remaining R150 000 to meet your final life time limit, but the rest may not be returned. So the warning is don’t use the money unless you really need too.
Which raises the idea that yes you can use the money. Tax free savers are like any other savings account, which means you can have access to the money at any stage and the best part is that there are no capital gains charged. However, once it is gone, it is gone.
The other problem highlighted by government is that when we change jobs, many of use cash in our retirement savings to pay off debts or go on a holiday, so the idea with the tax free saver is, use this money instead of cashing in your retirement savings. The main reason retirement savings are restricted is to ensure clients have the benefit of compounded interest which improves the growth of your money, but the minute you cash in your savings you lose the compounded interest and the gain is gone.
The one disadvantage that has been highlighted is that Retirement savings allow you to have a tax rebate, but a tax free saver does not. True, but a tax free saver must be used to compliment your current savings and allow you to create a safety net which prevents you from cashing in your retirement savings so that you can enjoy your golden years instead of worrying. Any form of savings for the future is a good idea. Sit with your advisor and see how you can add this to your future plans. The beauty is that it does not have to be a big amount, you can start as small as R500 per month, but starting it is the point.
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