SA is loving tax-free saving

New research from Intellidex released on Wednesday shows that 262 493 tax-free savings accounts (TFSAs) were opened in South Africa during the last tax year. This translates into around 700 new accounts being opened every day, and Intellidex notes that this rate remained fairly stable through the 12 month period.

TFSAs became available from March 1 2015, and the study covers the period up until February 29 2016. It it based on a survey of providers across the financial services industry, including banks, life insurers, stock brokers, the SA government and collective investment scheme providers.

The analysis found that the total assets held in tax-free savings accounts at the end of February this year was R2.57 billion. This implies an average account value of R9 785.

As one of National Treasury’s key objectives with tax-free savings accounts was to encourage saving in the country, it is encouraging that Intellidex estimated that 21% of accounts were opened by first time savers. The study noted that this shows that “the accounts do have a reasonable effect in galvanising people to become savers”.

However, respondents raised two major concerns.

The first was that many providers felt that the annual and lifetime limits on contributions to TFSAs are too low. They believe this is hindering their uptake.

“One growing point of discomfort with the regulations is the R500 000 lifetime limit,” Intellidex noted. “Respondents say this discourages savers from investing now out of fear they may in future need to draw on the savings and thereafter face a reduced limit.”

Banks were particularly vocal on the annual limit of R30 000 as well. A number made suggestions on this point including that this annual limit should be raised for anyone aged 65 or older, or that it should increase every year in line with inflation.

Amongst the non-banking respondents, however, a second concern was raised. This relates to the fact that 59% of all TFSAs have been opened at banks, and the majority of investments are in cash.

According to Intellidex, these providers felt that “the strong performance of cash accounts is absorbing savers’ lifetime limits, curtailing the ability of potential clients to use the accounts for more tax-efficient purposes such as equity investing”.

In total, R1.30 billion, or 50% of all the assets in TFSAs are in cash. Only R935 million is in equities.

What makes this problematic is that these accounts should predominantly be used for long-term savings as the benefits become exponentially greater over time. However, cash is a very poor performer over the long term.

One broker noted in its response that banks have “a major captive market of existing banking clients, but by channelling them into savings products, the full benefit of the tax-free dispensation is not utilised, and over the long term, as long as we have negative real interest rates, savers will get poorer in real terms.”

Intellidex makes no finding on why cash has been the most popular asset class, but the current volatility in equity markets alone is not enough to explain it. This is particularly evident if one takes into account that the majority of accounts have been opened at banks.

More likely is that investors lack sufficient knowledge about different types of savings vehicles. This points to a real need for better education.

What is also noticeable in this regard is that Intellidex found distinct differences in the average account size depending on the type of financial institution where the account was opened. The average size of the accounts at banks was R6 892, while those opened with collective investment scheme firms averaged R21 246.

This appears to support the contention from one asset manager quoted in the survey that the people who most need access to TFSAs are not yet exposed to them.

“At this stage, we find that most people who are interested in these products are already aware of the importance of saving,” the asset manager noted. “Those who need it the most will find it difficult to reach the limit of R30 000.”

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