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A couple of weeks ago we wrote an article on the Old Mutual Tax-Free plan. In that article we recommended you speak to an Old Mutual advisor before investing.
We received a lot of feedback from our readers, especially around the annual and lifetime limits. We decided to do a second article clarifying this. But let’s first do a quick recap.

Why should everyone own an Old Mutual Tax-Free Plan?

As South Africans, we pay an enormous amount of tax. It often feels as if we’re not getting much in return. Think for a moment of all the expenses which you would expect to be paid on your behalf from your taxes – schooling, hospitals, and retirement.

And especially when it comes to retirement, it’s all fine and well if you earn way more than what you spend, but not if you’re living from hand to mouth. Who can live on the R1, 600 a month old age pension offered by the state (The 2017 rate for those older than 60 but younger than 75)?

What’s even worse is the fact that there’s very little incentive to save.

Yes, you read right. While other people are splurging on fancy cars and dining out, you might prefer saving for a rainy day. But what does it help you?

  • If the investment goes pear-shaped, the only person suffering a loss is you.
  • If the investment booms, guess what? You’re not the only person making a profit. SARS also wants a slice of the action.

Capital gains tax, Tax on the interest you earn, Dividends tax, and Rental income…You name it, they tax it.

The idea, of course, is to tax the more affluent among us. The problem is that this comes at the expense of the less affluent since the same rules apply to them. Ignoring the tax problem makes matter worse because people who don’t save eventually become a burden on the state.

The only way to encourage people to save is by giving them a tax break for doing so. Out of this was born the Tax-Free Savings Account – something which Old Mutual refers to as their Tax-Free Plan.

The bottom line is that you pay absolutely no tax on any of the following:

  • Capital gains
  • Interest
  • Dividends
  • Rental income

Another nice thing is that you can cash in your investment – absolutely tax-free – anytime you wish.

When should you be careful with Tax-Free Plans?

Three main areas spring to mind:

  • When it comes to the amount you invest in any given tax year
  • The fact that you can’t make up for withdrawals, and
  • The maximum amount you may invest over your lifetime.

Let’s tackle these issues one by one.

How much can you invest every year?

It’s important to keep track of the tax year you find yourself in. As I write this we’re in the tax year ending on the 28th of February 2018. The current tax year started on the 1st of March 2017.

Right now you are entitled to invest R33, 000 a year in your Old Mutual Tax-Free Plan. This can either be as a lump sum or by investing R2, 750 each and every month. As long as you do not exceed the current R 33 000 annual limit.

Invest a cent more than this and you’ll pay a 40% penalty on that additional amount. So imagine you decided to invest R3, 000 a month. That’s R250 a month too much. Over a year this amounts to R3, 000 in total which you’ve overinvested. If SARS applied a 40% penalty to the R3, 000, you’d owe them R1, 200 in penalties. I can’t see the reasoning here. After all, why can’t they refund you the difference?

If you’ve met up with an Old Mutual advisor then this won’t happen. The problem comes in if you have a Tax-Free Plan with more than one company. Now you have to keep tabs on two investments instead of one. Why put yourself in this sort of pickle in the first place?

Can you make additional deposits to replace previous withdrawals?

No, you can’t. Let me explain.

Remember that we said you can cash in your investment anytime you want? Well, that’s true, but SARS wants to encourage a savings culture. If you’re going to treat this as a savings account, then how will you ever develop the savings habit?

So while SARS will allow you to take money out of your investment whenever you want, they won’t allow you to pay back that withdrawal. Your only option is to contribute the maximum allowed in that particular tax year.

How does the R500,000 maximum lifetime amount work?

It’s not tricky at all.

You are allowed to invest a maximum of R500,000 into your Old Mutual Tax-Free Plan over your lifetime. Old Mutual will make certain this never happens (although watch out if you own a tax-free plan with another company).

But this brings up a question: “What if my investment is already worth R500,000 and I’ve only invested R300,000?

The R500,000 lifetime limit only applies to the amounts you invest and not to the value of the investment. So if your investment is already worth R500, 000 and you have only invested R300, 000, you are still allowed to invest the further R200,000.

We hope this explains it more clearly than did the first article.

At the end of the day, we recommend you speak to an Old Mutual advisor first. They will provide you with advice tailor-made to your specific situation.

And don’t be scared to do this. What’s the worst that can happen – That they persuade you to invest R170 a month towards your very own Old Mutual Tax-Free Plan?

Can we help you with anything? Leave your details below and we will be in touch.

Leave us your thoughts in the comments section below.

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