South African investors take advantage of tax-free benefits

Many South African investors embraced tax-free savings benefits and took advantage of the country’s high interest rate environment over the past year through tax-free savings accounts.

FNB revealed that its customers’ tax-free savings account balances grew by 21% year-on-year, and volumes increased by 18% year-on-year.

“The growth shows that our customers are adopting and taking advantage of tax-free savings account benefits in light of the high interest environment,” said FNB’s CEO of retail cash investments, Himal Parbhoo.

“This further indicates that there is a growing culture amongst our customers who are starting to save.”

• In 2023 and 2024, FNB saw 11% of its customers manage to fully fund their tax-free savings accounts. 
• Over 20% of customers who fully fund their accounts have a scheduled transfer compared to 17% last year. 
• 66% of the customers who fully fund their accounts do so through a once-off bulk deposit.

Parbhoo said this helps them maximise their returns during the full cycle by benefiting from compound growth.

“The purpose of a tax-free savings account is to save money and allow it to grow over time. It is not intended to be used as a transaction account or emergency fund,” he explained. 

“This is because the initial contribution counts against your lifetime contribution, so if you contribute the maximum threshold amount and then withdraw from it, you are unable to top it up again during that financial cycle.” 

Any amount contributed to a tax-free savings account above the threshold could be taxed at a 40% rate.

“We have seen a slight decrease of customers withdrawing balances, but there is 32% of customers who have withdrawn balances, resulting in them not fully maximizing on their tax-free savings account benefit,” said Parbhoo.

“Therefore, it is advisable to leave contributions untouched to take advantage of your tax-free savings account benefits.”

He recommended that South Africans rather save for emergencies on a savings account that gives them instant access to their money to avoid being penalized.

“We encourage customers to include tax-free savings accounts in their long-term financial strategy as the contributions are tax-free up to a lifetime limit of R500,000. This includes capital dividends, dividends, and compound interest growth. The annual contribution cap is R36,000.”

A tax-free savings account has multiple product types that allow investors to invest across multiple asset classes, such as cash, unit trusts, and shares.

“When looking at tax-free savings accounts, consider your savings and investment objectives and your timelines,” he said. 

“Also consider exposure to more growth-type assets, such as unit trusts or exchange-traded funds that have a stronger exposure to growth-type assets if the goal is long-term, such as augmenting retirement provisioning.”

Many banks and other financial service providers in South Africa offer tax-free savings accounts.