Lately, the South African government has been looking to address the prevalent problem in our society of both individuals and households simply refusing to save a large enough portion of their income. The government’s solution to this problem? New tax free investments made available to all!
Why is Saving Important?
It can be very tempting to go out and spend all your money as soon as you receive it but there is no denying that this strategy will have disastrous consequences in the long run. Saving is in fact extremely important for a variety of reasons:
- Income protection – If, by a stroke of misfortune, you lose your means of a consistent income then a substantial sum of savings is critical to preserving your current standard of living until a new job or means of income is found.
- Unforeseen Payments – Life can be cruel and having the savings to account for this fact is key.
- Taking Opportunities – Often grasping an opportunity is dependent on laying down an initial cash deposit.
Perhaps the key variable that stops households from saving is a low rate of return and, bearing this in mind, the South African government has decided to introduce several new tax free investments.
The government’s plan essentially revolves around the concept of incentivising the public to save by offering tax free status to a certain portion of one’s income which is saved. This tax free contribution cannot exceed R30000 in any given year and has a lifetime limit of R500000. Perhaps the most enticing thing about this tax free account is that it really is tax free! This is to say that even interest and dividends earned on your annual contribution limit will not be taxed!
So which forms of investment are eligible for this tax free status?
- Interest Bearing Accounts and Collective Investment Schemes
- Exchange Traded Funds
- Insurance products
It is worth noting that, although stockbrokers are included as eligible service providers, the direct trading of individual shares does not qualify within the tax free account. This is out of fears that the tax free contribution would be used to purchase highly volatile penny stocks in order to guarantee greater returns, which is not an activity the South African government is looking to promote. However, it was made clear that the government promotes the idea of investing in diversified exchange traded funds through a stockbroker and thus investment in the stock market isn’t completely off the table.
This policy has been deployed in such a way that withdrawals from the tax free account are not to be encouraged on the side of the investor, namely, any amount withdrawn from your tax free account cannot be replaced. This was done with the intention of making individuals and households think twice about tampering with their investments!
In conclusion, these new tax free investments represent a fantastic opportunity through which individuals can save themselves money every year. Furthermore, there seems to be no immediately obvious downside. Essentially, you will be richly rewarded if you are only but willing to save!