Tax-free investments and savings accounts are designed to encourage proactive long-term saving. The value proposition is simple – invest in ring-fenced funds and you’ll pay no taxes on your capital gains, dividends or interest earned.

With tax rates of 18% on capital gains, 20% on dividends and 15% on interest earned, it’s easy to see why the tax savings are so appealing.

In addition, you have a wide choice of saving and investment options available to you, from simple saving accounts to unit trusts. This variety means that you can use your savings for different goals such as your children’s education, a deposit on a home or as a very long-term retirement investment for your kids.

As with any good deal, there are terms and conditions that you need to be aware of, as some of these could lead to penalties or losing out on the full impact that tax-free accounts offer.

Firstly, you qualify for the tax benefits only if you invest in a registered tax-free fund.

Know your tax-free options

Registered tax-free accounts fall into 3 broad categories.

The tax-free savings account is a basic option if you want to make smaller monthly contributions by stop order or debit order. The minimum deposit amount is relatively low, making a tax-free savings account the ideal stepping-stone to saving regularly.

Tax-free unit trusts are the ideal way to invest for the medium to long term. Unit trusts pool the contributions from fund members, and are a popular, low-friction way to invest in the market. Once you have retired, a tax-free fixed-deposit investment can be used to stay ahead of inflation without putting your capital at risk.

Annual and lifetime limits

If you’re a South African citizen, you can contribute a maximum of R36,000 a year up to a lifetime total of R500,000 tax-free. You can open an account for yourself, but also for your spouse and each of your children.

Be aware of one important condition tied to savings placed in these accounts – any amount withdrawn cannot be replaced simply by making extra deposits later. This is because you cannot pay more than your lifetime limit of R500,000 in contributions. So, if you’d contributed R100,000, for example, and you withdrew R50,000 to pay for an emergency, then you’re only allowed to contribute another R400,000, not R450,000, before you reach your lifetime limit.

The temptation to make catch-up contributions if you’ve made withdrawals is actively discouraged by a 40% penalty tax on all contributions above the R36,000 yearly limit. This also means you can’t make extra contributions to make up for missed payments in a previous year.

Make a transfer rather than cashing out

Understanding and being aware of these limits can help you avoid making costly mistakes while managing your tax-free investments.

Consider the following: You want to move funds from a tax-free savings account into a tax-free unit trust, or from one investment company to another. Unlike any other investment, you shouldn’t simply withdraw the funds and deposit them into another tax-free investment, as this is seen as a new contribution that further reduces your annual and lifetime limits.

Instead, you should request a tax-free savings transfer from one account to the other.

How to transfer into a Nedbank or Nedgroup Investments tax-free investment

If you’re switching a tax-free investment to Nedbank or Nedgroup Investments,  you must complete the Tax-Free Savings Transfer Request Form.

When making a transfer this way, your annual and lifetime limits remain unchanged, which helps to retain the benefits that tax-free accounts were intended to offer.