South Africans are generally poor savers and the slow growth rate of our economy is likely to make it increasingly difficult to save. Most South Africans are experiencing financial pressure and recent statistics show that, as a country, we are amongst the worst savers in the world. To encourage a culture of savings, national government has taken significant steps to incentivise its people to save more. However, with so many options available it is often difficult to know where to begin saving. We have unpacked six different savings vehicles, all of which serve a unique purpose:
1. Savings Accounts
Description: A savings account is an interest-bearing deposit account held at a bank or financial institution, usually providing a modest interest rate. Savings accounts are a good place to keep unneeded funds because your money will attract interest and your money will grow. It is a liquid investment which provides you with ease-of-access to your funds, making it perfect for housing your emergency fund. On the other hand, with funds being so accessible, investors may be tempted to access their money. Banks, however, may limit the number of withdrawals you can make from your savings account each month, and they also may charge fees unless you maintain a certain average monthly balance in the account. Generally, banks need to be given notice when large withdrawals need to be made. Depending on the bank, one can set up a savings account with a minimum deposit of R50.
Access: Money in a savings account is accessible immediately.
Perfect for: Short-term savings and quick access to funds. A savings account is a good vehicle to house an emergency fund as long as you have discipline not to dip into your savings.
2. Money Market Funds
Description: A money market unit trust fund is a safe, secure and reliable investment. Many investors use money market funds for short-term savings, emergency funds or to park assets for short periods of time. Providing relatively quick liquidity, money market funds offer an excellent alternative to savings accounts as they offer higher interest rates. However, money market funds do require higher balances and/or monthly premiums, with entry levels being around R50 000 or R500 per month. It is important to note that the returns of a money market unit trust fund will struggle to keep pace with inflation over the long-term after taking taxation into account.
Access: Money held in a money market fund can be accessed easily upon written instruction from the investor. Generally, no fees are charged for withdrawals.
Perfect for: Money market unit trusts are a good place to park or ‘store’ your money while at the same time earning some returns. They are suitable for investors who want to preserve their capital with minimum volatility.
3. Tax-Free Savings Accounts
Tax-Free Savings Accounts (TFSAs), which were introduced to South Africa in March 2015 as part of non-retirement savings, allow people to save up to R33 000 per year in specially designated savings accounts, with a lifetime limit of R500 000. TFSAs are offered by asset managers, insurance companies and banks, and funds can be invested in equities, fixed income accounts or both. All proceeds, which include interest income, capital gains and dividends from these accounts, are tax-free. Individuals are allowed to open two tax exempt savings accounts per year. Fee charges do vary from provider to provider, so it is important to shop around for the lowest rates.
Access: Money is accessible within 7 working days of notifying the TFSA provider.
Perfect for: Tax-free Savings Accounts make excellent savings vehicles for education or for young people starting out on their savings journey.
4. Unit Trusts
Unit trusts, or collective investment schemes, are a unitised portfolio of investments that is managed by a fund manager according to a specific investment mandate. Unit trusts, or collective investments, allow the average investor to gain access to normal asset classes such as shares or property. A unit trust investor can contribute via a monthly debit order or a lump sum deposit, following which the investment house buys underlying asset classes such as shares, bond or property. In return, the investor gets a unit in the fund. Having exposure to various asset classes in a properly diversified portfolio can help investors achieve their financial goals. Generally, investment houses require a minimum monthly investment of R500 or a lump sum investment of R20 000. There are no tax deductions on your unit trust investment, and you will be taxed on your investment returns. Investors may also be liable for Capital Gains Tax when selling their units.
Access: Once the investor has notified the investment house of his intention to withdraw, funds are generally paid out within 7 working days.
Perfect for: Unit trusts are perfect for anyone looking to invest non-retirement savings in a diversified and professionally managed portfolio in order to achieve a specific medium or long-term financial goal.
5. Retirement Annuities
A retirement annuity is essentially a private pension fund held in the name of the investor. New generation retirement annuities are unit trust investments that offer investor flexibility, more transparency and greater cost-effectiveness. A retirement annuity is a very tax-efficient investment vehicle for your retirement that allows you to build capital during your working years so that you have enough money to enjoy the same standard of living when you retire. Investors can to invest up to 27.5% of their taxable income tax-free into a retirement annuity (up to a maximum of R350 000 per year). Income tax and CGT are not charged on the investment returns achieved in a retirement annuity.
Access: Investors are not permitted to access the funds in their Retirement Annuity until age 55.
Perfect for: A Retirement Annuity is an excellent way to save for retirement with before-tax money.
6. Preservation Funds
A Preservation Fund is designed to house the proceeds of your pension or provident fund upon resignation, retrenchment or dismissal. Once your funds are transferred, no further contributions can be made towards your preservation fund. Preservation Funds are essentially designed to preserve your accumulated retirement capital so that you are not tempted to dip into your retirement funds. In order to encourage South Africans to save their retirement funds, the transfer to a Preservation Fund is tax exempt, and no tax is paid on your investment returns.
Access: You can make one partial or full withdrawal from a preservation fund, prior to age 55.
Perfect for: A Preservation Fund is perfect for anyone moving between jobs and who wants to avoid the temptation of cashing in their accumulated retirement capital.
There is more to saving than the accumulation of money and the creation of wealth. Saving money and living beneath one’s means, skills that should be fostered from childhood, are essential lessons that permeate every aspect of our lives. Being able to delay gratification, appreciate the value of time and money, and exercise self-control are by-products of habitual saving. As T.T. Munger noted, “The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates a sense of order, trains to forethought, and so broadens the mind.”
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