Personal-Finance

The difference between an RA and a TFSA

2018-02-03 19:09

The culture of saving is one which is still growing in South Africa and many people do not understand the benefit of compound interest.

“This is where investment vehicles, such as the tax-free savings account (TFSA) and retirement annuities (RAs) can benefit consumers. Although they are two completely different products, both can add tremendous value to your financial wellbeing.

These products are easy to start and have significant tax advantages and wealth accumulation benefits,” said Barrie van Zyl, senior manager at Alexander Forbes, who says both products provide investors with essential income and lump sum benefits at retirement.

“The TFSA can also be used over the lifetime of the investment to provide savings benefits for emergencies, house deposits school fees or even holidays.

“It is a flexible and affordable investment that makes saving for a child’s education or car deposit really easy.

“You can start from as little as R200 a month (capped at R33 000 a year) and can contribute R500 000 to the investment over the lifetime of the product. The fees are minimal, you can pay via debit order or lump sum, you have immediate access to your capital and there are no penalties when withdrawing.”

The best benefit of a TFSA, however, is that no tax is levied on the investment.

“This means you do not pay interest on the growth and there is no income tax, capital gains tax or dividend tax. Because of the tax advantage and the low fee structure, you have more money available to grow over time and the longer you leave it the more you will benefit.”

The RA is a longer-term investment.

“The ultimate purpose of an RA is to provide income at retirement, however it has other advantages as well.”

Although you cannot access the money prior to the age of 55, you may withdraw all available capital on formal emigration, subject to tax. “At retirement, you will be able to access at least one-third of the capital in cash, also with tax considerations, which can be used to pay off debt, provide additional income or buy a new car,” Van Zyl said.

An RA cannot be ceded as security for debts and you may not transfer the policy to another owner, which safeguards your investment. You can nominate beneficiaries on the policy, which will assist the trustees in appropriately allocating the investment on your death.

The minimum investment amount is R250 a month and you will be able to invest a maximum of 27.5% of your gross remuneration to the fund for income tax deduction purposes. “There are various fee structures to choose from and new age RAs are much more flexible in terms of premium holidays and payment structures.”

Both products allow you to structure the portfolios in such a way that it suits your risk profile and personal circumstances. It is best to consult a certified financial planning professional who will advise you on an investment strategy based on your personal needs and objectives. 

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October 14 2018