South Africans, with their poor savings record, should look to tax-efficient savings vehicles to make the turnaround to grow their wealth. The national average savings rate is a dismal 3%, while the household debt-to-income ratio is a staggering 74.4%.
Barrie van Zyl, a senior manager at Alexander Forbes, says consumers may find the wide range of investment offerings overwhelming, and this may be a reason for their faring badly when it comes to saving.
“This is an indication that South African consumers make debt for purchases and expenses, leaving little room for savings. The majority of the population do not have any savings to tap into in case of an emergency, and instant-gratification purchases are preferred over long-term savings and investment commitments,” Van Zyl says. “More frightening is the fact that nine out of 10 South Africans will not be able to afford to retire comfortably, or at all.”
Many people do not understand the benefit of compound interest. “This is where investment vehicles such as a tax-free savings account (TFSA) and a retirement annuity (RA) can benefit consumers. Although they are two completely different products, both can add tremendous value to your financial well-being. These products are easy to start and have significant tax advantages and wealth-accumulation benefits.”
Van Zyl says both products provide investors with essential income and lump-sum benefits at retirement.
“The TFSA can also be used over the lifetime of the investment to provide savings benefits for emergencies, house deposits, school fees or even holidays. It is a flexible and affordable investment that makes saving for a child’s education or car deposit easy.
“You can start from as little as R200 a month (capped at R33 000 a year), and you can contribute R500 000 to the investment over the lifetime of the product. The fees are minimal. You can pay via debit order or lump sum. You have immediate access to your capital, and there are no penalties when withdrawing.”
The main benefit of a TFSA is that no tax is levied on the investment. “This means you do not pay interest on the growth, and there is no income tax, capital gains tax or dividends tax. Because of the tax advantage and the low fee structure, you have more money available to grow over time, and, the longer you leave it, the more you will benefit.”
An RA is a long-term investment. “The ultimate purpose of an RA is to provide an income at retirement. However, it has other advantages.”
Although you cannot access the money before the age of 55, you may withdraw all available capital on formal emigration, subject to tax.
“At retirement, you will be able to access at least one-third of the capital in cash, also with tax considerations, which can be used to pay off debt, provide additional income or buy a new car,” Van Zyl says.
An RA cannot be ceded as security for debts, and you may not transfer the policy to another owner, which safeguards your investment.
You can nominate beneficiaries on the policy, which will assist the trustees to allocate the investment on your death.
The minimum investment amount is R250 a month, and you can invest a maximum of 27.5% of your gross remuneration to the fund for income tax deduction purposes.
“There are various fee structures to choose from, and ‘new-age’ RAs are much more flexible in terms of premium holidays and payment structures.”
Van Zyl believes a combination of these two investments will add value to your financial position.
“Both products allow you to structure the portfolios in such a way that it suits your risk profile and personal circumstances. It is best to consult a Certified Financial Planner professional, who will advise you on an investment strategy based on your personal needs and objectives.”`
