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Video: Tax-free savings

Mar 24, 2021

Do you know how much tax you save by investing in a tax-free savings account? Sanlam Investments did the maths and found that you can save hundreds of thousands of rands. So why pay tax when you can make money?

To recap: you can invest up to R36 000 a year into a tax-free investment account and all local dividends, interest and capital gains are tax free.

If you contribute to more than one tax-free investment, the total combined contributions cannot exceed R36 000.

Currently a R500 000 lifetime limit applies, but this only applies to your contributions, not your growth. Any dividends that are reinvested do not count as contributions.

The real tax benefit is only significant if you leave the investment to grow over time.

Sanlam assumed an investor maximised their R36 000 tax-free savings contribution for the first 14 years to reach the R500 000 lifetime limit and then left the balance to grow in a market-related investment earning 4% dividends and 6% capital growth a year.

After 20 years the investor would have R1.9 million saved. If she had paid dividend tax during that period the investment would only be worth R1.7 million.

That’s a saving of more than R200 000.

She would also be able to draw the full value tax-free, as capital gains tax would not apply.

The amount of capital gains tax payable would be determined by the investor’s tax rate.

Someone in the 45% tax bracket would owe SARS R139 000 in capital gains tax, leaving her with only around R1.6 million if she invested outside a tax-free investment account.

So the combined tax saving of dividend and capital gains tax is a massive R342 000.

Tax-free savings accounts can be accessed through any investment company and are a great way to supplement your retirement benefits, as you draw the proceeds tax free. If, however, you have other life goals, you can still access the funds before retirement.

Related video: Tax-free investing

4 Comments

  1. your comments and advise on investing in a long term investment with a bank over full 5 years at an effective rate of return per annum of 5,38 percent. thank you

    Reply
    • Bank accounts are low risk and may be appropriate for someone in retirement, but for someone who is younger and has 15/20 years to invest then market investments (unit trusts etc) may be a better TFSA option

      Reply
  2. kindly sign me up for Maya on money weekly newsletter.

    Also please advise if a long term investment with a bank offering an effective rate of return per annum of 5,38 percent over full 5 year term which is tax free, is a good investment to consider.

    many thanks

    Reply
    • There is a newsletter sign-up box on the home page. Please let me know if you were unable to sign up

      Reply

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Maya Fisher-French author of Money Questions Answered

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