Did you know that when you invest, tax can reduce your returns significantly? It can be discouraging, but on the bright side, you've got options to prevent that from happening. Tax-efficient investing can minimize your tax burden and maximize your returns.

How to be tax efficient with your savings

According to Marius Pretorius, Old Mutual Head of Marketing: Retail Savings and Income Solutions, there are various savings vehicles available to suit a range of South Africans' needs. “These consist of retirement annuities, unit trusts, and tax free savings accounts, among others. Not only do these vehicles have different rules, levels of liquidity, and flexibility, they're also regarded differently by SARS from a taxation point of view.”

If you don't consider the impact of tax, it could hamper your ability to reach your savings goals. “An extreme example is deciding to take your retirement savings in cash when you change jobs. This could have massive tax implications and may impact your ability to retire comfortably. Sadly, too many people opt to cash in their retirement savings when they change jobs” says Pretorius. “This is why it’s important to have a financial adviser who can provide advice on the best way forward, according to your specific financial needs and goals at any particular stage.”

If you don’t get your money right, you can’t get your future right. It's critical to ensure your long-term savings plan is on track. He points out that Retirement Annuities (RAs) are particularly tax-efficient to encourage longer-term saving. Contributions are tax-deductible up to a set limit and the growth in your Retirement Annuity isn't subject to tax on interest, capital gains tax, or dividends tax. In addition, there are also tax concessions at retirement.

To optimize your savings for tax efficiency, Pretorius believes that South Africans should also consider a Tax Free Savings Account (TFSA), the next most tax-efficient savings vehicle. “Most people start off by saving money in a savings bank account. Although bank accounts are a good option from a short-term perspective, the interest earned is low compared with market-linked invested alternatives,” he says. “Investments traditionally attract a range of taxes, such as income tax and capital gains tax for the investor, or taxation within the investment fund, and can impact the ultimate return earned.”

How can I invest and save money tax free?

A Tax Free Savings Account is a specific tax structure that the government created to allow individuals to save up to R 46 000 per tax year with a lifetime contribution limit of R 500 000, without paying any tax in respect of the investment. Tax won't be deducted on your interest, dividends, and capital gains, or when you withdraw from the investment.

How is a TFSA different from other types of savings accounts?

A TFSA is different from other savings accounts in how the tax is calculated. With a TFSA, the entire growth is tax-free which means you'll typically get a higher effective return in a Tax Free Savings Account than in a regular taxed savings account (assuming you have the same underlying assets).

A regular taxed savings account will be exposed to a variety of taxes e.g. dividend withholding tax and income tax. This means that before you benefit from the return, the tax will have to be deducted.

The example below demonstrates the tax benefit a customer will enjoy by investing in a TFSA as opposed to a regular savings account.

What are the benefits of a Tax Free Savings Account?

• Enjoy flexibility. You can contribute how you want, whether it's contributing a once-off sum during the tax year, or a recurring premium where you choose how much to add every month or when you can. The annual and lifetime contributions to the investment must however remain within the limits discussed above.
• You can withdraw at any time. Keep in mind though that because of the maximum (annual and lifetime) contribution limits, it should not be seen as a short-term savings investment.
• You have access to a wide variety of underlying funds to choose from to suit your financial goals.

South Africans are spoiled for choice when considering which underlying assets to invest in. You can elect to invest in a pure interest-bearing account or consider growth assets such as equities. Since Tax Free Savings Accounts are appropriate for medium to long-term investing, it’s important to consider a strategy that includes growth assets.

The growth you can expect will depend largely on what type of underlying assets you invest in. Generally, the higher the expected growth the riskier the investment would be and, on the other hand, the lower the return the lower the risk. Old Mutual cannot guarantee your returns on the investment.

Since there is such a vast choice and combination of funds to choose from, a qualified Financial Adviser can help you determine the best solution to help you reach your specific goal.

How do I get the most from my Tax Free Savings Account?

1. Start early and make the maximum allowable contribution each year

Saving and investing without the burden of tax is always fantastic. However, the really big tax benefits come to those who remain invested for the long term. This is because tax savings increase over time as compound growth is earned on the tax saved. Invest as much as possible at the beginning of the tax year to take advantage of growth throughout the year.

2. Avoid the temptation to withdraw money

Even though you can withdraw from your TFSA at any time, it is important to also be aware of the long-term implications of doing so. You could potentially risk not being able to replace the funds you've withdrawn and end up not meeting your desired goal.

3. Choose funds according to your needs

When you invest in a TFSA, the time you want to invest and your risk appetite should influence how you go about managing your portfolio. Choose a fund according to your goals and financial needs.

How do I get started?

You can apply online for your TFSA. If all this information seems overwhelming, you can chat with one of our friendly and accredited financial advisers. They're here to help you reach your financial goals in the best way possible.

Once you've joined the Old Mutual family, you can download the Old Mutual App to stay up to date with your policies and rewards. Visit the Apple App Store, Google Playstore (device-dependant) or Huawei App Gallery to get started on your financial wellbeing journey.