YOUR MONEY: The road to completely tax-free savings

I have a modest amount of savings in a regular tax-free savings account with a large bank. What is the difference between a tax-free savings account and a tax-free exchange traded fund (ETF) or investment account? And what are the benefits of each for maximising savings?

Also, can you move your tax-free savings account from one institution to another without incurring a penalty? Are there limits to how many times you can move your savings between institutions?

Sam T 

A tax-free investment is an incredible product to optimise in any portfolio. You are allowed to invest R36,000 a year and R500,000 in your lifetime. Therefore it will take about 14 years to reach the allowed limit of the product. The limits apply only to contributions made, not the growth within the product.

The main benefit, as the name says, is that the proceeds on this investment will be completely tax-free one day. Therefore the investment strategy followed is very important to ensure you are optimising the end result — and not having any negative consequences due to tax payable. All other investment vehicles will have some form of tax effect one day, such as tax on interest earned, capital gains tax, or sliding scales where you pay income tax at retirement.

There is no current regulation when it comes to how you invest the product (as we have with retirement funds), so you can, for example, invest 100% in an offshore feeder fund, or take on 100% equity exposure.

Below is an example of how you can optimise the product over a 14-year term. If you then leave these funds for another 10, 20 or even 30 years, you can accumulate a significant portfolio — and the proceeds will be tax-free. Allowing this investment enough time to reap the benefits of compound interest, you can essentially build your retirement around it. You will be able to earn a tax-free income.

For this reason, my advice would most definitely be to have a much longer-term mindset around this investment and not merely use it 20 years down the line.

If we assume an annual growth rate of 10%, then R36,000 invested annually over 14 years will grow to R1,052,463.91. Now let’s look at a few different scenarios over time if this amount remains invested:

If we had to view this as a retirement option, we normally recommend a 5% drawing of fund value. If the investment could have accumulated an average of 10% return for another 40-year period, you can retire with a monthly (tax-free!) income of R198,473.88 (not inflation-adjusted). Not bad for just spending some time in the market.

I find the banks tend to opt for cash or fixed-income solutions (the fixed-income options may lock in your funds for five years, so be careful). Following an ETF approach is an active vs passive debate. Are you merely tracking an index, or opting for a more diversified multimanager approach?

You are allowed to have more than one tax-free account. Just don’t exceed the annual R36,000 limit.

You are also allowed to transfer a tax-free investment to another platform — though this may not be the case in the short term if you’re locked into a fixed-income time frame. In principle there are no penalties when transferring between wealth platforms — but I would recommend an adviser check for you first depending on which platform you are currently invested on.

Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

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