The new tax-free savings accounts that were introduced on March 1 this year are a lifeline for South Africans who are over-indebted.

The government's intention in allowing this new type of saving was to incentivise consumers to save with more flexibility, low fees and greater transparency so that they may access these funds in an emergency without having to incur further debt.

"The chief incentive to save through a tax-free savings account is that the growth on your savings, whether in the form of interest, dividends or capital gains, will not be taxed, maximising the opportunity for compounding growth," says. Sinenhlanhla Nzama, investment product manager at Old Mutual.

"Tax-free savings accounts are in line with the focus of Finance Minister Nhlanhla Nene, and his predecessor Pravin Gordhan, on making it easier for South Africans to save."

Nzama cautioned savers against frequently accessing their accumulated savings.

"Although tax-free savings accounts allow you access to your savings at any time, we urge our customers to build up funds over the long term and maximise the tax advantage. The legislation means that there is a 'Use it or Lose it' opportunity each year and if you disinvest funds you cannot reinvest them in excess of the R30000 limit for that year," he said.

In line with the age-old adage that "it's time in the market that counts", customers should rather try and build up the savings in their tax-free savings plan over the long term to gain the significant impact of tax-free compound growth.

Compound interest is where you earn interest on the interest already earned and has a snow-balling effect on your savings.

"For this reason it's also true that the sooner you start to save, the better," Nzama says.

He that tax-free savings provide an excellent opportunity, especially for younger South Africans. As a guideline, if you're young and start saving early, tax-free savings are generally the better option than conventional savings products. However, if you are saving specifically for retirement, the conventional retirement products still also offer tax benefits.

"But the principles of good financial habits remain, even though the precise mechanics may change: Free yourself of short-term debt, save first and spend the rest, rather than spending first and saving the rest, and get good financial advice."

Nzama says tax-free savings could also provide lifelines for young, single, working mothers who see no way to save for retirement. "Many working, single moms receive little or no support from the fathers of their kids and do wonders to stretch what money they have, so tax-free savings provide an opportunity for them to start saving early."

A new tax-free savings plan includes these benefits:

• Start saving from as little as R350 a month or with a lump sum investment of R5000;
• Access your savings, and change your premiums without any extra charges or penalties;
• Nominate beneficiaries and avoid estate process delays and executor fees;
• Protection from creditors in the event of insolvency;
• You can acquire a tax-free plan for each of your children to help save for their education;
• Access to a range of funds from top asset managers; and
• Very low administration fees.

For further information, check www.oldmutual.com

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