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AN OPPORTUNITY TO AUGMENT YOUR ANNUAL TAX PLANNING

Hugo Malherbe - PPS Investments

Choose Your Tax Free Savings Account (TFSA) Wisely
 
A TFSA is a long-term investment vehicle which can be a valuable addition to your existing plan, due to its significant tax advantages. Since the introduction of the TFSA legislation on 20 February 2015, you've probably been faced with a myriad of TFSA-related news and marketing messages. It may be tempting to make a decision hastily, but it's worth taking a step back and ensuring these decisions are fully informed and costs are fair, especially since high fee charges within some of the available options on the market could erode some of its tax benefits. We'd like to help you understand more about what to consider when making your selection.
 
We will introduce a fairly priced tax free savings account to the PPS Investments suite towards the end of this tax year, just in time for your next annual tax planning conversation. We will send you a personal reminder closer to the time.
 
1.            It can be an important facet of your annual tax planning conversation
 
An investor's contribution to a TFSA should ideally be reviewed on an annual basis. An opportune time to do so is towards the end of each tax year as part of your annual tax planning conversation, which should enable you to determine accurately if your RA contributions during the year warrant an allocation to a TFSA. Some investors may want to set up a debit order on an annual basis, and use the end of the tax year to calibrate.
 
2.            It is not a short-term investment
 
The TFSA provides the greatest benefit as a long-term, not a short-term savings vehicle (a time horizon of longer than ten years) and is best used in combination with existing retirement savings for post-retirement support. Using the TFSA for short-term goals could impact negatively on the taxation of future long-term savings, while using the TFSA for long-term goals could provide a significant tax relief. When saving for short-term goals like a holiday or school fees, it is still worth considering a normal discretionary savings account. We do recommend that investors consult their advisers before making such decisions. 
 
3.            It should not be your only investment vehicle
 
A TFSA allows investors to contribute a maximum allowable amount without being charged capital gains tax (CGT) when accessing these savings or switching funds, dividend tax when receiving dividends, or income tax on interest earned on these contribution amounts.
 
All proceeds are tax-free in their hands.  Given the contribution limits of R30 000 per year and R500 000 lifetime in total, it should not be the only investment vehicle used, but it can be a valuable element to incorporate into a broader financial plan, provided it is used and chosen wisely.
 
4.            Consider an RA first, if you don't have one already
 
A TFSA should be an enhancement to a retirement savings plan, not a replacement. The TFSA should ideally be considered only once an investor is already contributing to a retirement savings fund. Retirement annuity funds, pension funds and provident funds would generally be seen as the first options for long-term savings. With these options, not only would interest earned, dividends received and capital growth be tax free, but a tax benefit will be received on contributions to these funds. There is however a tax implication on these savings at retirement when making withdrawals and when receiving annuity income from these savings after retirement. This is true up to a certain contribution size. However, beyond the optimal RA contribution size, an annual TFSA contribution can become a better savings option than an additional retirement fund contribution.
 
5.            Be aware that some TFSA options may charge higher fee structures
 
While a number of leading investment businesses in the country have not yet brought to market their TFSAs, a number of offerings have been launched with the aim of achieving an "early-mover advantage”. When evaluating some of these options, be wary of questionably high fee charge structures which seem inexpensive at face value. High costs can easily erode the tax benefit of a TFSA contribution over a normal discretionary savings contribution.
 
6.            Transferability is limited
 
It is especially important to be sure the selected option is suitable, since an investor will be unable to transfer the TFSA to another company or product until March 2016. In addition, thereafter if they withdraw their savings, it will impact the allowed lifetime contribution limit of R30 000 per year and R500 000 in total. Contributions to a TFSA should therefore be carefully considered, and deciding which TFSA to use should also be done with caution until the regulator allows transfers out of a TFSA.
 
PPS Investments is aiming to launch a TFSA in the second half of the tax year.
 
Since a TFSA can be highly beneficial if an investor is already sufficiently contributing to a retirement savings fund, we do believe it to be in the interests of our clients. We will be introducing a fairly priced tax free savings account to the PPS Investments suite well before the end of the current tax year, just in time for your next annual tax planning conversation, when we have greater clarification on a few regulatory restrictions around the TFSA (relating to access to a number of renowned and top-performing unit trusts in the industry). This clarity will ensure we’re able to introduce an offering that is of high calibre and provides access to an optimal investment mix.