Smart spending drives tax-free savings growth

The financial impact of the COVID-19 pandemic on people’s lives is set to last long beyond the initial crisis, in some cases permanently changing consumer behaviour. Sisandile Cikido, the head of retail investments at Nedbank, discusses how increased cost-cutting can help to improve the long-term saving and investment culture in South Africa.

According to a recent McKinsey survey on the impact of the pandemic on consumption behaviour, 79% of people in South Africa have started to save in their everyday lives, with most of them intending to continue doing so beyond the pandemic.

South Africans affected in one way or another by the outbreak and its associated lockdowns have changed stores, brands, and the way they shop, with an astounding 90% in growth of intent to shop online across all categories. There is a shift to value-for-money items, and sticking to essentials and foregoing discretionary or luxury purchases.

However, consumption is just one area in which consumers can make real savings, and is itself limited in its long-term impact on overall wealth.

It’s therefore advisable to return to saving at the same level as before the pandemic or even more, as soon as the opportunity presents itself.

Although a regular cheque account might seem like a safe place to keep extra cash, it’s eroded by inflation from one year to the next. Also, when the money is there, it’s much easier to spend it. 

However, when invested, the money can go to work, earning a return, and is much harder to spend on non-essentials.

The cost of forgoing spending in the present alongside market fluctuations is a reality of retirement planning and wealth creation. However, you can at least save on taxes while taking advantage of inflation beating investment returns.

In 2015, to encourage saving, the National Treasury launched a tax-free investment incentive offer to all South African citizens. The annual individual contribution limit was increased to R36 000 (with a lifetime maximum of R500 000).

Tax-free savings accounts (TFSA) include a range of vehicles, such as a monthly savings account, a fixed-term bank account, a unit trust investment, and others.

While the risk profile of each of these products varies, they all have a substantial edge over cheque accounts and an additional benefit over several investment accounts.

The simple fact that they don’t attract tax means your investment growth won’t be affected by your individual tax threshold, making them a must-have investment.

The extent to which South Africans are taking advantage of this is unclear, but South Africa continues to grapple with a high rate of personal debt, with 10 million South Africans having impaired records, a total of 20.7 million accounts, according to a recent National Credit Regulator report.

Through disciplined spending and living within their means, people can leverage the benefits of tax-free savings accounts not only to chip away at their debt, but also embark on a long-term path to financial freedom.