As of 1 March 2018 transfers between TFI product providers will be possible. What factors should investors consider?
On the 28 February 2017 National Treasury announced that Tax-Free Investments (TFI) transfers between product providers will be allowed from 1 March 2018. On the 31 March 2017 Treasury also published Regulations in terms of Section 12T (8) of the Income Tax Act that set out the requirements of transfers between product providers.
What opportunities, if any, will TFI transfers bring investors?
We have seen from research done by Intellidex that investors have opened up around 460 000 accounts by 28 February 2017 even though TFI was only launched on 1 March 2015. Only 2 years after TFI was launched the Intellidex report* showed that investors contributed almost R5.2 billion into different types of TFI accounts. The report indicates that just over 88% of assets under management (AUM) sits in either cash, life assurance products or collective investment schemes (unit trusts). The majority of AUM sits in the cash space (40.7%) while life assurers are next best placed (26.5%) followed by collective investment schemes (20.9%).
The benefit of the new transfer legislation is that investors will be able to assess their tax-free investments and ensure that they are in an investment structure that works best for the individual circumstance.
Considerations for investors when selecting tax-free investment vehicles
Cash products offer fixed deposit and notice-deposit type options. However it would seem that notice deposit products, which provide more flexibility in terms of access at a lower interest rate than a fixed deposit product, are proving to be more popular.
Tax and inflation
One challenge that cash products (including Money Market and Income unit trusts) have in comparison to life assurers and the wide range of risk-return profiles available within the unit trusts space, is competing with inflation. Whilst a tax-free investment is technically a liquid product that allows for immediate access to one’s cash, the annual and lifetime contribution cap reduces every time the investor contributes - and once withdrawn, the investor cannot "replace" the withdrawn amount against the contribution caps. From a tax perspective, it is therefore best to remain invested for as long as possible in order to maximise the tax benefits.
Another consideration for cash TFI investors is that every natural person in South Africa is entitled to an interest exemption of R23 800 (under 65) or R34 500 (65 and older). If a 45 year-old, cash TFI investor has contributed the maximum of R93 000 annual contributions (over the last three years) and is not utilising any of the interest exemption elsewhere, then it is safe to say - from a tax perspective - that it wouldn’t matter at this stage if the investor was in a TFI product or a normal notice/fixed deposit product.
Let’s look at an example assuming a generous return on a notice deposit product of 8%. This would generate interest of R7 440 for the year which would fall well below the interest exemption of R23 800. This investor, who does not utilise their annual interest exemption of R23 800, would not pay tax even if they were in a normal notice deposit product. It would be interesting to note how many of the investors in cash TFI’s have utilised all of their annual interest exemptions elsewhere and are actually benefitting from a tax perspective in being invested in a cash TFI.
Another consideration for TFI investors to determine whether they are in an appropriate product, is the product features. An investor should ask the following questions:
- Am I able to access my cash if need be from day 1?
- Do I intend on using the product as a legacy product and not withdrawing the market value over my lifetime - in which case the allowance of a beneficiary on the product may be important to an investor?
- Am I able to invest without accessing my funds for a number of years?
Another big consideration especially considering the negative publicity that dreaded "exit penalties" has received over the last few years is whether or not there is in fact an exit penalty on your TFI product.
Can a product provider refuse to abide by transfer regulations?
A product provider may refuse to accept a transfer in based on their product rules but is not allowed to refuse a transfer out, except under a few exceptional circumstances. In fact, if a product provider is unable to transfer any amount on request to another product provider, then the product provider will not be able to accept any further amount in respect of any TFI nor can it administer any TFI other than a TFI administered before the date on which that product provider is unable to transfer that amount.