To encourage a culture of savings, in 2015 National Treasury passed legislation to allow South Africans to save tax free through either a tax-free savings account or a tax-free investment product. By offering a product in which you don’t pay any tax on the income, dividends or capital gains generated within the product, or at the time of withdrawing your money, they believed that people would be encouraged to save more.

However, according to Coronation, the uptake of these products has been very low. Out of a tax paying base of around 7.2 million citizens, only about half a million people have opted to save tax free, and the bulk of these have done so mainly through tax-free savings available through banks.   

While Coronation commends people who have already made the smart move to save as much as they can, they believe it is important to understand the difference between saving tax free and investing tax free. At the end of the day it boils down to how long you plan to save.

Investing (vs saving) is smarter over the long term

If you are planning to save for the long term (i.e. more than five years), you really want your money to work as hard as it can and be exposed to the best growth potential, explains Coronation.

When you save with a bank, your money earns a predictable level of interest. When you invest with an investment manager in a product such as a unit trust, your money is invested in financial assets such as shares, bonds and property. Over the long term, these financial assets have greater potential to provide better returns than you would get from just saving your money with a bank.

Remember, you need to beat inflation

One of the key obstacles to overcome when investing is inflation. In order to grow the purchasing power of your capital over time (which is just financial speak for your ability to buy what you want), it’s important to invest in assets that outpace inflation – otherwise you simply end up in the same, or even worse, position.

While savings accounts with your bank definitely have their place in your overall financial portfolio, you will hardly ever enjoy inflation-beating returns.  Whereas growth assets (such as shares and listed property) have the potential to not only protect your money from the erosion of inflation, but to grow your wealth over time.

To illustrate the difference: if you had invested R1 in the money market through a bank 90 years ago, you would essentially only be able to purchase R1.15 worth of goods today. But, if you had invested it in shares, you would be able to purchase R538 worth of goods today – a truly remarkable difference.

So, is investing tax free a bit of a no-brainer?

The key to investing is to really think longer term. By investing over multiple decades in the years before retirement, and leaving your money invested, allows it to comfortably withstand the effects of short-term market volatility (performance ups and downs) that are typical of the financial markets. Over the long term, history shows that the bumps smooth out and the overall trend is for your money to grow more over time than it would if it were earning interest in a bank.

Remember, there are some limits to investing tax free

If you decide to invest via a monthly debit order, you can start from as little as R250 with Coronation, or up to a maximum of R2 750. If you decide to invest annually, you can contribute a maximum of R33 000 per tax year, and up to a maximum of R500 000 over your lifetime.

Investors also have unrestricted access to their money within a tax-free product. However, just be mindful that all amounts invested will count towards your annual and lifetime limits regardless of any withdrawals you make. In other words, you can’t ‘replace’ the money you withdraw with a new investment.

So, is it a hassle to move from saving to investing?

It’s easier than you might think to switch from a tax-free savings account to a tax-free investment product, and there are no costs involved. 

Investing tax-free with Coronation

The Coronation Tax-Free Investment offers access to a range of their flagship domestic and rand- denominated international unit trust funds.  

To find a fund that is suitable to your needs, Click here, speak to your financial adviser (if you have one) or email [email protected]

Coronation is an authorised financial services provider. Terms & Conditions apply.