Tax-free savings accounts – another half-baked offering!

I was recently interviewed on radio about the new tax-free savings accounts (TFSA) that are being introduced on 1 March 2015. Any attempts to encourage savings in a country where household debt levels hover around 80% needs to be applauded and encouraged but as I prepared for the session I found it increasingly difficult to be positive about the accounts. So call me grumpy if you want but I am really not excited about the new accounts.

Here’s why.

Clearly government is not aiming at you and me with these accounts but rather at the “poorer people” who don’t save. However, the following needs to be remembered before we get too excited.

1. Those that are currently not saving are not saving because they are over-indebted and they don’t have spare cash – we certainly don’t want them borrowing more to invest into these accounts. We need to get debt levels down first!
2. Those that are currently not saving cant afford the high minimum premiums that (most) unit trust companies will impose. I have spoken to a few where the minimum debit order will be between R500 and R1000 pm with minimum lump sum amount of R10000 – clearly not aimed at those that are currently not saving. So then we look to the insurers who traditionally have played in the lower premium space and so far I have found only 1 offering with a minimum premium of R300 pm (not too bad) but with a minimum monthly admin fee of R30 – that’s 10%. Low premium business is not profitable (our banking fees are too high).
3. Those that are currently not saving will not have any tax issues even if they do start saving. At R30000 per annum they will not be subject to tax on interest nor CGT. There will be some dividend withholding tax but it’s really, really small and any saving on the DWT would be quickly eaten up by the high admin fees above.
4. Those that are currently not saving usually don’t buy products – they are sold them. At 30k, the maximum remuneration that an advisor is going to earn would be ±R900 (assuming a max initial fee of 3%). Taking into account all the legislative requirements around FAIS and that most of these advisors will end up giving away ±50% of their commission to their employers an advisor might see ±R450 rand for 2-3 hours work – not to mention all the ongoing admin and service that will be required from dealing with the accounts (not attractive enough in my opinion).

According to the 2014 budget speech, TFSA’s are intended to replace the current tax-free interest exemptions that people enjoy (R23800 pa if you are under 65 and R34500 if you are over 65). We are not sure if the exemption will be removed or just not adjusted each year for inflation so that it effectively becomes worthless over time but the problem is that being able to put in only R30k per year means that anyone who has been living off their interest is going to effectively start paying tax on interest (if the exemptions are removed or not adjusted).

Currently someone over 65 can invest ±R500000 into a money market and earn the interest tax-free. Under the new TFSA they will put R30k into a money market in year 1 and will earn ±R1500 tax free and the balance will then be left in “normal” money market and subject to income tax. This is crazy and is surely not what was intended?

So far, the only real use I can find for the TFSA is for parents to fund their kids’ education with them – my advice is to put the contributions that you were investing into the TFSA – growth is tax free and there will be no CGT when you take it out one day (18 years’ time). The only “catch” is that it will only ever pay out to a bank account in your child’s name – this is not a problem while they are still minors as the parent effectively controls the account but it could be an issue once they turn 18.

I am also of the view that the R30000 annual amount is far too low – government may not be targeting the “wealthy” but any additional saving needs to be encouraged. It is also money that will stay in SA and help to grow the economy. The UK equivalent account (ISA) has an annual allowance of ±R270000 (15000 GBP).  Why so low in SA?

The annual cap is also problematic and a simple adjustment could see a more significant uptake of the product: rather than a R30k annual contribution with a R500k life-time cap, the account should rather be a life-time R500k cap. That would mean that anyone who had funds could invest it right now or sooner than the ±17 years it is going to take to reach the cap. Pensioners with cash sitting in a money market could then transfer the funds to the TFSA and then enjoy the tax-free interest or better still could get the benefit of compounded tax-free growth.

So all in all, to me, the TFSA is just like the other government initiatives to encourage saving (Fundisa and RSA Retail Bonds) great in theory but very poor in application. Is anyone at treasury in touch with what actually happens at the coal-face?