Why high charges erode the benefits of tax-free savings accounts
In March this year, the National Treasury introduced tax-free savings accounts.
The main reason behind the treasury introducing these accounts was to encourage South Africans to save, especially those on lower incomes. Saving is something many South Africans aren't good at.
So what exactly are tax-free savings accounts? And what should you need to watch out for?
Read on to find out…
What are tax-free savings accounts?
As the name suggests, tax-free savings accounts
are exempt from tax. This means any interest you earn, capital gains or dividends are free from tax.
But there are some rules to tax-free savings accounts:
You can only deposit up to R30,000 a year into your tax-free savings account. If you put in more than this, you’ll pay tax on it.
You’re limited to R500,000 over your lifetime. If you used your full allowance each year, it would take you just over 16 years to do this.
Once you withdraw money out of your tax-free savings account, you’ve lost that allowance and you can’t make it up.
You can use tax-free savings account to save cash and invest in a variety of different vehicles, including unit trusts and exchange traded funds.
Why you must pay attention to fees charged on tax-free savings accounts
Many banks and different financial institutions have introduced their tax-free savings account offerings since March. But it appears that fees may wipe out any benefits of the accounts.
Scott Field, the financial director of FedGroup, says “exorbitant bank charges are scuppering all intentions of using tax-free savings to benefit low income earners and address the poverty cycle,” reports Fin24
Mr Field says those who’re depositing the smallest amounts will feel the hit of banking fees the most.
With the average transaction charge for these accounts being R5, it means if you’re depositing R100 a month, you’ve lost 5% of your investment immediately. And you’ll incur a charge every time you make a deposit.
This means interest earned on deposits will be lower thanks to the fees charged.
Before you start putting money into a tax-free savings account, consider the transaction charges. You may be better off keeping money aside and depositing a larger lump sum less often to try to offset the impact of fees.
So there you have it. Why high charges erode the benefits of tax-free savings accounts.
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