Unlocking the true value of Tax-Free Savings Accounts for South Africans

South Africa’s national savings rate fell to 14% in 2023. The country has one of the world’s worst savings rates compared to its emerging market peers. This has an inevitable knock-on effect, with the Financial Sector Conduct Authority (FSCA) finding that 90% of the population cannot continue the same standard of living in retirement. In the current high-inflation, high-interest cycle, financial advisers have a pivotal role to play in helping clients to save – and invest – what they can.

Duma Mxenge, Head of Business and Market Development at Satrix, advocates making Tax-Free Savings Accounts* (TFSA) a cornerstone of savings strategies for South Africans, given that they offer tax-free growth on investments, dividends, and interest earned.

“We need to shift our local savings culture to a mindset that every cent saved, matters. We want to empower our populace to ‘sweat’ their savings to work harder, by investing these with a longer-term horizon. Regular contributions of small amounts add up. TFSAs are flexible, with tax advantages from the get-go, whether you are investing R100 or the full R36 000 yearly allowance upfront.”

TFSAs Need a Rebrand

Mxenge stresses that advisers can show their clients that TFSAs can open up a world of investing options. “You are the custodians of client relationships; you know each client’s risk tolerance and time horizons. TFSAs assist you to build a diversified portfolio of assets around your client’s needs, often at comparably lower costs. From exchange-traded funds (ETFs) to high-yield savings accounts for shorter-term savings, there are a wealth of options to align with different budgets and financial goals.”

While TFSAs have traditionally been ‘sold’ to South Africans as savings vehicles, they need a ‘rebrand’ as robust investment tools. Mxenge adds, “Ideally, the true purpose of a TFSA should be long-term investing to earn returns to supplement people’s retirement savings. As the allowance is capped at R36 000 per year, with a lifetime limit of R500 0000, people can often afford to take on more aggressive, high return investments. The limits protect individuals from heavy losses, while all ‘wins’ have zero tax liabilities.”

Here are some strategic methods to encourage clients’ TFSA savings:

1. Emphasise the investing aspect: Help clients to fully appreciate the TFSA as a robust investing tool, rather than simply as a savings vehicle. Build a unique, diversified portfolio around the client’s specific goals and timelines. This means granular goal setting across the savings and investing spectrum.
2. Help clients to automate contributions: Implement automatic transfers to ensure consistent contributions.
3. Budget prudently: Help clients to prioritise savings in their financial plans, allocating a portion of income before discretionary spending. This may mean shifting mindsets from simply being in survival mode to adopting a longer-term outlook.
4. Start small, scale up: Assist clients to begin with modest contributions if necessary, and progressively increase them over time. Show how even small contributions can grow, given the magic of compound interest.
5. Encourage clients to stay the course: It’s crucial to emphasise that a TFSA should not serve as an emergency fund. While your savings account – or emergency fund – and your TFSA both benefit from the power of compound interest over time, your TFSA will have the added benefit of the tax savings over the investment period.
6. Showcase the simplicity: Demonstrate how simple it is to move funds to the SatrixNOW platform and allocate these across the various vehicles – equities, bonds, balanced funds, index-tracking ETFs – that will make their money work harder for them.

Encourage clients to delve deeper into TFSA intricacies, exploring various investment vehicles and aligning them with individual risk tolerance and objectives.

By embarking on a strategic investing journey today, clients can unlock the full potential of their TFSA, paving the way for long-term financial prosperity.

This article was first published here.

*Tax-Free Savings Accounts: Annual limit of R36 000, lifetime limit of R500 000, 40% tax penalty applicable for contributions above the limit, per individual. For more information visit https://satrix.co.za/tax-free-investments

Disclaimer

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.