The announcement of this incentive, intended to promote savings, received a fair amount of media coverage. It will be interesting to see whether this continues, and what impact it will have on the very low percentage of savings of the nation’s disposable income.
It is a long held perspective in the industry that few people save on a voluntary basis. Most people, including me, took out endowment policies as a means of providing for future goals, be it for a child’s education or a trip overseas. Unit trust investments often catered for shorter term goals. Endowments, before the days of shareholders, achieved wonderful returns in general, and became a very handy crutch when short-term cash was needed.
Very little of the above happened without the intervention of a financial advisor.
Recent attempts to induce a savings culture, particularly in the lower income section of the population, appear not to have been as heartily endorsed and supported by the would-be beneficiaries as anticipated. The two major contributors to this was the fact that advisers were not remunerated for “selling” the products and a lack of knowledge on the part of the target market.
Moneyweb recently published an extensive list of providers who offer tax free savings as part of their product mix. Please click here to access the article.
A number of providers do not have products available yet, in view of the late publication of the final Notice and Regulations regarding these schemes.
The maximum annual contribution to a tax free savings scheme is R30 000.
Minimum monthly and lump sum vary significantly, as does the management fees charged by providers, according to the information supplied in the Moneyweb article. While these are important factors when deciding on where to invest, few members of the public have the knowledge or time to shop around for what best suits their needs.
Little mention is made of advisor fees, possibly as a result of this not being clarified in the regulations. It appears that such fees will have to be agreed to by the investor, and administered by the product provider, which is very much in line with the RDR proposals.
The danger of unintended consequences appears to be real.
A person in the low income segment of the market, who is exempt from paying tax, will receive no benefit from using these savings vehicles.
The regulations do not appear to discern between investor and premium payer. This could mean that those in the top tax brackets may see this as a great opportunity to reduce their liability in terms of taxes on interest, dividends and capital gains. A family of five may contribute up to R150 000 per year. The maximum total contribution per investor may, in this example, be as much as R2.5 million.
NB We have requested clarity on the matter, and will report back as soon as we hear from the authorities. No doubt, we will see regular changes to the current structure of these products, particularly from a regulatory perspective, to ensure the desired effect is achieved, and loop holes are blocked.
The RDR proposals make reference of endowments sold to policyholders with a tax rate of less than 30% being replaced with more suitable products. It is possible that a tax free scheme may be the answer when this happens.
What will happen to tax free savings schemes once the media discovers something new to write about? Will advisors include it in their product mix, or focus on other products that generate a better income for them?