Nedbank: What’s all the fuss about tax-free savings? And why should you care?

 As the new tax year approaches, most people’s thoughts turn to whether there is any way of saving more of their hard-earned money and reducing their tax burden . The good news is that there is an easy way to do both – with a tax-free savings or Fixed Deposit investment account.

Since the tax-free savings allowance was first introduced by government in 2015, there has been a lot of excitement about the opportunities that South Africans now have to grow their savings in the long term, without having to pay any tax on the interest they earn.

But why the hype?

Sisandile Cikido, Head of Retail Investments at Nedbank explains that the ‘hype’ is easy to understand. Before tax-free savings and investments options were made available, anyone who saved or invested their money, and earned more in interest than the annual interest exemption would have to pay tax on the growth of their savings or investments above that exemption. The incentive about tax free savings is all proceeds including, interest, dividends and capital gains, on the disposable of these investments, are fully exempt from tax.

The interest exemption basically means that any interest or capital growth you make on your total savings and investments in a tax year, which, in 2021 was  R23 800, won’t be taxed if you are under the age of 65. Any amount you earn in interest over that R23 800 will be taxed at your tax rate for that year. For persons who are 65 years and older will be taxed R34 500.

“The tax-free savings allowance from government effectively gives you a way of extending that interest exemption,” Cikido says, “because all the interest you earn on the money you put into a tax-free savings or investment account will not be taxed. When you consider that a R500 000 is a lifetime   contribution or investment can easily grow to double that amount,  in a favourable interest cycle, where interest is compounded, and if the annual contribution of R36 000 is maintained approximately 15years or more. The benefit of never having to pay tax on that growth is huge.

To get the most out of your tax-free savings, it’s worth making sure that you understand how the different savings and investment products work, and what benefits they can offer you. Cikido offers a few valuable guidelines:

Tax-free accounts are  simple to open  with little to no fees

Many people are hesitant about saving and investing because they are worried about the costs (stated or hidden) charged by the account provider. Some also fear that the interest rates offered on money deposited into these accounts are too low to achieve real growth. A good tax-free savings account addresses both these concerns, by charging  a competitive interest rate that delivers solid capital growth over the long term. For example, the Nedbank Tax Free Fixed Deposit gives the potential to earn up to 5.74%  interest per year on your annual lump sum deposit of up to R36 000.

Saved money is smart money

When placed in an interest baring account, saving  can yield great returns. Blindly following the latest financial trend is seldom a good way of growing your money. So, while many people are learning some painful lessons about why alternative approaches to saving and investment aren’t always the best type, those who took the smart money path and have been saving in tax free accounts, are still seeing steady growth, and the peace of mind of knowing that they will never be asked by SARS to pay tax on those earnings.

Saving can start now

The most common reason most people have for not saving is that they think they don’t have the money to do it. That’s because many people mistakenly believe that you need to have a lot of money to deposit into a savings or investment account, and then you need to keep on depositing big amounts regularly in the future. None of that is true for tax free savings accounts. In fact, a Tax Free Savings Account lets you start saving from as little as R500 per month. And while you can sign up for a free stop order to ensure you make regular monthly deposits, you can also adjust the amount you save from month to month depending on your financial circumstances.

Save your way

Keeping track of your savings and watching them grow is an important way of staying motivated and excited about your savings journey. With Nedbank’s tax-free savings and investment options, you are in full control. You can track your account in real time on  digital channels; you get to choose how often you want your interest reinvested into your account; and you can do good through your savings by signing up for your choice of Nedbank Affinity so that Nedbank donates to causes close to your heart, at no cost to you. So, you’re not just saving for yourself, you’re also helping to save the planet.

An already tough economic situation in the recent past, exacerbated by the pandemic has had a negative impact on many people’s income. Most of us now want a way of stretching our money, protecting it if things turn bad again, and giving ourselves at least some small measure of certainty and security around the future of our finances. Tax-free savings and investment accounts do all that, and more thanks to a combination of reliable interest growth and the knowledge that this growth will never be reduced by having to pay tax on it.

In conclusion Cikido says, stop thinking that you can only start saving when you have more money. With the mounting financial pressures, long-term investing is moving further out of reach for most individuals. With this frightening reality,  individuals must make investment a bigger part of your financial life, while taking advantage of substantial tax savings over the long term.