Lizl Budhram, Head of Advice at Old Mutual Personal Finance
More than a decade after tax-free investment accounts were introduced to encourage South Africans to save, Old Mutual believes the time has come for the government to refresh the limits to reflect today’s economic realities and meaningfully improve long-term financial and retirement outcomes.
Lizl Budhram, Head of Advice at Old Mutual Personal Finance, says that when used strategically alongside traditional retirement vehicles, tax-free investment accounts can play a critical role in helping individuals strengthen their retirement outcomes, but only if the framework allows sufficient room for meaningful contribution limits.
Introduced on 1 March 2015, tax-free investment accounts were designed to incentivise savings and help shift South Africa’s chronically weak savings culture. While annual contribution limits have been adjusted over time from R30 000 initially, to R33 000 in 2018 and R36 000 in 2021, the lifetime contribution cap has remained unchanged at R500 000 since inception.
At the current limits, an investor contributing the maximum amount each year would reach the lifetime cap in approximately 14 years, which restricts the long-term usefulness of these accounts as complementary retirement savings vehicles.
Budhram argues that while tax-free investment accounts were a positive policy intervention, their full potential will only be realised if the limits are adjusted to meet current realities and support more flexible retirement savings solutions.
She adds: “Tax-free investment accounts were introduced with the right intent, but more than ten years on, the contribution limits need to better reflect the foundational objective behind their introduction. When used alongside retirement funds and preservation vehicles, these accounts allow investors to build tax-efficient savings that can supplement retirement income and provide flexibility later in life”.
Budhram is calling on the Minister of Finance Enoch Godongwane, when he tables the national budget later in February, to consider increasing the annual contribution limit to R40 000 and the lifetime limit to R600 000.
“An increase to R40 000 a year, which works out to just over R3 300 a month, would remain disciplined and accessible for many savers while significantly enhancing the long-term value of the tax-free benefit. Increasing the lifetime limit to R600 000 would also extend the investment horizon, allowing investors to benefit from tax-free growth for longer,” she says.
Budhram cautions, however, that investors need to be acutely aware of the rules governing tax-free investment accounts, as excess contributions can be costly. Annual excess contributions are subject to a penalty tax of 40 percent on the amount exceeding the allowable limit.
Importantly, while investment returns may cause the value of a tax-free investment account to exceed the annual or lifetime limits, this growth does not count as a contribution and does not trigger penalties. Issues arise when investors withdraw returns or capital and then reinvest those amounts into a tax-free investment account, as this is treated as a new contribution and affects both the annual and lifetime limits.
“The tax-free benefit applies to the growth within the account, not to repeatedly withdrawing and reinvesting funds. Investors need to be careful when moving money in and out, as any amounts withdrawn cannot simply be replaced. Doing so is treated as a new contribution and may trigger the 40% tax penalty if contribution limits are exceeded,” Budhram explains.
She also notes that tax-free investment accounts are strictly investment vehicles and should not be used as transactional accounts. While individuals, including minor children, may hold more than one tax-free investment account across different institutions, the annual contribution limit applies in aggregate across all accounts.
“Parents can invest on behalf of their children, which is a powerful way to build long-term wealth early, but it is important to remember that each child has their own annual and lifetime limits,” she adds.
Qualifying tax-free investments include fixed deposits, unit trusts, certain endowment policies, linked investment products, and exchange-traded funds that are classified as collective investment schemes. Each of these options have their own implications and benefits which need to be carefully considered when selecting the best vehicle. It is possible to transfer your investment between these vehicles.
Budhram believes that increasing the limits would reinforce the original intent behind tax-free investments and give South Africans a more realistic opportunity to build wealth without the erosion of tax over the long term.
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