Deadline looms for tax-free savings accounts

Savers have just two days to top up their tax-free saving accounts as the tax year ends on Tuesday, February 28.

Sygnia Asset Management’s portfolio manager Wessel Brand said the best way to invest in a tax-free savings account is based on understanding dynamics and being savvy about investment.

“Investing for the first time doesn’t need to be overwhelming, as long as you know the secrets to starting out right. You’ve made it beyond the “Salticrax for the last week of every month”-stage of your income-earning life. You’re older but still young, and you finally have a bit of cash left at the end of every month. You know the smart thing to do is to invest, and you want to – but you don’t know where or how to start.

If this roughly describes your current financial situation, you’re not alone. A recent study conducted by data analytics firm Kantar found that most South Africans are aware of the importance of saving but are put off by the complexity of formal savings and investment options, said Brand.

He also stated that people do not need to have a lot of money or know anything about investing “in order to make your money work well for you”.

“You can access an easy, simple and safe investment option with little capital and zero knowledge that will deliver between 22% and 42% more growth than more complex, time-consuming investment strategies,” he said.

As the tax-free savings account (TFSA) was introduced by the government to encourage South Africans to save, it is a 100% tax-free investment vehicle available to all, from new-borns to retirees. It allows every citizen to invest R36 000 a year, up to a maximum lifetime contribution of R500 000.

You may have already heard about TFSAs, but judging by the limited uptake of this golden opportunity, most South Africans don’t fully understand its benefits. So here are three solid reasons a TFSA should be the first vehicle for any investor:

  1. A little makes a lot

The beauty of paying zero tax is that it allows your investment to achieve its fullest potential over time due to the positive effect of compound interest year after year. While R36 000 a year may not seem like a huge amount, throw the full effect of compound interest into the mix, and it can amount to a tidy sum over the years.

  1. Zero expertise is a bonus

Just open a good TFSA with low fees (aim for maximum fees of between 0.2% and 0.4%, or slightly higher for more exotic passive funds); pay your monthly instalment or make an annual lump sum investment (up to R36 000 a year) before 28 February each year; and then forget about it. In 20 to 30 years, you can pat your younger self on the back for your foresight.

  1. Control what you invest in

A common misconception is that TFSAs are a single or set investment product, like the fixed interest money market accounts offered by most major banks. A TFSA is an investment vehicle regulated by the SA government. It has to stick to certain regulations, and it must have low fees.

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