Am I the only one who dislikes Tax Free Savings Accounts (TFSA) and all the hype that goes with them?
Let’s take a step back before getting all excited about TFSA’s. They were introduced (by Government) to encourage non-savers to save and unfortunately, Continue reading The great Tax Free Savings Account con!
I get a lot of spam email but I really hate it when I receive unsolicited offers to invest from insurance companies. Today I received an email from Old Mutual offering to save me money with their Tax-Free Savings Account (TFSA). Apparently, you can start saving with as little as R170 per month, pay no tax on the investment and withdraw the funds at any stage although it is advisable to stay invested for at least 3-5 years.
So let’s take a closer look at this offering from OM.
One of the most important things to consider is the fees and costs of a product – there is no point being able to save when a significant portion of your investment will be gobbled up by fees. So what are the costs on the OM TFSA?
“An administration charge of 0.75% per year of your fund value will be charged. This will be deducted at the end of every month. If you do not have a regular investment set up on any of your Old Mutual Invest Plans, or if your regular investment is cancelled, the administration charge will be a minimum of R20.00 per month. The administration charge can be reduced with our Investment Maximisers.
Asset management fees are deducted by the fund managers of the underlying investment funds which you choose. The amount of the asset management fees will depend on the funds you choose.
If your regular investment is less than R350, an investment charge of 5% will apply to each regular investment.”
This is taken from their website (my highlighting)! If you save “from as little as R170 pm” you are going to lose 5% of each contribution you make. So over a year you would have invested R2040 but would lose R102 of this in fees. In addition to this you are also going to pay an annual admin fee of 0.75% and then the fund fee on top of that.
Reading the fine print more closely also reveals that if you invest less than R350 pm then you can only invest in the OM Moderate Balanced Fund. Although relatively new, the fund has a poor track record and also has an annual fee of over 2%. You certainly will make a small fortune if you use this product.
While the OM TFSA might make some sense if you plan to invest the maximum each year, it certainly does not make sense to me if you are investing less than R350 pm. If this is the case then stay away from the OM TFSA.
There are many better options out there with similar low investment amounts but before you invest in any of them, make sure that you understand all the fees that will apply.
There seems to be quite a bit of activity around the new TFSA accounts and yet it seems to be by all the “wrong” people. By this I mean that the people who seem to be getting excited are not the actual intended beneficiaries…we seem to be forgetting that the TFSA accounts are intended to encourage “non-savers” to save. I’ve thought about it quite a bit and perhaps there is scope for more creativity on this whole thing?
National Treasury seems hell-bent on not being seen to favour the wealthy in the country – why else would they cap the TFSA at R30k pa or put a proposed cap on retirement contributions? They need to rememeber that the wealthy pay the tax in the country and need to be encouraged to invest in SA just as much as anyone else does…
Some of the problems with the TFSA account being aimed at people who are not currently saving is that they are over-indebted, they dont have the funds to save and they are traditionally unreliable when it comes to honouring debit order commitments. These factors all add to the costs of doing business in this sector.
So what about a system where the “wealthy” use their allowance to invest a portion into someone who has not yet been saving’s account? We could to this by having a significantly increased annual allowance – such as R200k but where this can only be attained when the investor allocates an amount (say 5%?) to someone who is currently not saving.
I imagine something like me putting R100k per annum into a TFSA but where 5% of this is then allocated to a “previously disadvantaged saver” such as my domestic worker or her children’s account. I would happily pay this to get the advantage of tax-free growth as well as to try to “redistribute” some of the wealth in SA. For example, when I invest my R100k – R95k of this would go into my account and R5k would go into my domestic worker’s children’s fund (for example). There would obviously need to be conditions put in place to prevent the abuse of the system but with something like this we would all benefit. So how about it, surely we can come up with something that makes it better for all?
I wrote the piece below towards the end of Feb just after the regulation around TFSA’s was announced* and at the time that OM (life) announced the launch of their offering. I took the information directly from their website and then got contacted by someone from OM about my information being incorrect…my response to this is that one of the main criteria of the TFSA is that “products qualifying as tax free savings and investments should be simple to understand, transparent in their disclosure and suitable for the majority of individuals making use of such savings and investment products”.
I dont want to pick a fight with OM but my challenge to them is that their products (and those of some other providers) are not sticking to the letter or spirit of the law by being simple and transparent. If I, as a “so-called sophisticated investor” struggled to find and understand the product information, then how is the person at whom the product aimed going to get it right?
The reality is that in order to make the product accessible to the “yet-to-save”and also profitable for the company, either the fees need to be “high” or the minimum amount needs to be high. In trying to develop a product for the mass market while at the same time trying to make it profitable, it is my opinion that the TFSA offering has got too complicated.
Whilst many have heralded the introduction of the TFSA as a great thing, what they are also forgetting is that the TFSA is not aimed at them – it is intended to encourage non-savers to save. One of the real challenges that emerges from the introduction of the TFSA’s is that as much as government want people to save and invest, it is not profitable business to deal with some sectors of clients. Some of the problems are as follows:
- Bank fees in SA (for debit orders and rejected debit orders) are far too high
- Smaller debit order clients tend to default too frequently
- The combination of the above 2 factors makes the cost of providing products for the “lower end of the market” too expensive.
Perhaps rather than trying to be all things to all people, what OM (and others) should do is set a minimum investment amount at R1000 pm (or whatever the level is that makes the investment profitable) and then when National Treasury gets all heated up about this, perhaps they should point out the reasons that make this business unprofitable – such as high bank fees and uneducated clients.
Or perhaps there is scope for more creativity on this whole thing? National Treasury seems hell-bent on not been seen to favour the wealthy in the country – why else would they cap the TFSA at R30k pa or put a proposed cap on retirement contributions? They need to rememeber that the wealthy pay the tax in the country and need to be encouraged to invest in SA just as much as anyone else does…
So what about a system where there is a significantly increased annuall allowance – such as R200k but where this can only be attained when the investor allocates an amount (say 5%?) to someone who is currently not saving. I imagine something like me putting R100k per annum into a TFSA but where 5% of this is then allocated to a “previously disadvantaged saver”. I would happily pay this to get the advantage of tax-free growth as well as to try to “redstribute” some of the wealth in SA. For example, when I invest my R100k – R95k of this would go into my account and R5k would go into my domestic worker’s childrens fund (for example). There would obviously need to be conditions put in place to prevent the abuse of the system but with something like this we would all benefit. So how about it, surely we can come up with something that makes it better for all?
*I have since revised the article with this response…