I currently have a tax-free fixed deposit account with Investec, which I opened in 2016. I have been contributing the maximum allowable annual limit since then. The amount in the fixed deposit is approximately R200 000. It matured in March 2021. Due to the current low-interest cycle, I want to convert this tax-free fixed deposit to a tax-free investment account. Can you advise on a suitable product (decent returns with low fees)? Any other considerations in this regard?
It is good to see that you have been taking advantage of the tax-free savings account (TFSA) since the product was introduced in South Africa.
The decision to transfer your tax-free fixed deposit to a tax-free investment account is a good idea, as a tax-free savings account should be utilised as a long-term savings vehicle, and therefore an allocation into a tax-free investment account is more appropriate.
The tax-free fixed deposit account that you are invested in is held in cash. Presently, you receive no tax savings as you are not exceeding the R23 800 annual interest exemption for persons younger than 65 (or R34 500 for persons older than 65).
If you are looking for a low-cost tax-free investment account, you should consider the one in the form of an exchange-traded fund (ETF).
Benefits of such an account include:
- You do not need a broker to set it up, and there are several online platforms available.
- Transferring your tax-free account will be easier, as the funds are held in cash, thus not requiring a transfer of instruments.
- You can choose to transfer a portion of your TFSA or the full value.
- The tax-free savings account is liquid, and there will be no penalties on withdrawals.
- This is a passively managed platform; therefore, you have a choice of a wide range of approved EFTs and can choose the ETF that is suitable for you.
- The wide range of approved ETFs offering is both locally and globally.
- This option is suitable for an individual with a long-term investment horizon, as investing in ETFs will increase your exposure to risk.
- The investment platforms will provide you with information documents, such as the Minimum Disclosure Document and other documents about the ETF.
When doing the transfer:
- Contact the new provider to provide you with the forms and requirements that will be required to transfer the tax-free deposit account to the tax-free investment account.
- Do not allow the funds to be paid into your bank account; they should be paid directly to the new service provider.
- If funds are paid to your bank account, this will be deemed a withdrawal, which will reduce the lifetime allowance by the amount you have contributed.
I wish you all the best in your investment journey, and may it yield great results.