Middle-income earners capitalising on tax-free savings
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By Nonhlanhla Kunene 10 December 2015
Low-income earners are benefiting from tax-free savings accounts (TFSAs) – despite structural difficulties for them to do so – while middle-income earners appear to be the most active segment.
Launched on March 1 this year, TFSAs have seen a relatively positive uptake, as suggested in the Tax-Free Survey conducted by Intellidex, the publishers of this site. The question remains, however, whether TFSAs are achieving National Treasury’s primary objective to encourage more savings among the low to moderate income groups.“TFSAs were designed to encourage savings in general. While I think they were aimed at the public in general, I do feel they have to be made more accessible to lower income groups,” says Rupert Giessing, head of product development at PSG . “What we’ve done to encourage savings is to offer a recurring contribution of [as little as] R500 [per month].”
However, statistics from Standard Bank suggest the uptake from the lower-income segment is substantial, with 58% of the bank’s TFSA holders being in the lower- to mid-income segments.
Nolene Parboo, senior manager of savings and investment, says, “The highest take-up with the SBSA Tax-Free Call Account has been in the lower (30%) to middle (28%) income segment, with 65% of the contributions coming from individuals aged between 30 and 45 years.” She says this also meets Treasury’s objective for a simple, easy to understand TFSA offering.
While Stanlib could not give precise figures, Katakuzinos, says its tax-free products have appealed mostly to the middle-income segment of its clientele. “It is difficult to say who exactly has benefited from investing in TFSAs as we do not have income records of our clients. Hopefully the South African Revenue Service and National Treasury will provide us with such information in the future,” he says.
“Our gut feel is that our unit trust tax-free savings accounts have mainly attracted middle-income investors. In this difficult economic environment, low-income earners do not usually have R30 000 a year, or R2 500 a month, available to invest for the long term.
“However, I think it is starting to make sense for middle-income investors who are seriously trying to save. They are seeing the benefits of putting money into tax-free investments. Over the life of the investment they could enhance their compound returns by between 2% to 3.5% per annum. Over 20 years this will make a huge difference in helping them reach their savings goal.”
First National Banks’ findings seem to back Katakuzinos’ sentiments, with the company reporting an uptake of 58% among the higher-income segment and 42% from the lower-income group.
Stephan Buys, FNB’s head of strategic collaboration savings &investments, says the average contribution into TFSAs by the lower-income group was more than R16 000. That is 10% lower than the average contribution from the higher-income segment.
He says 84% of clients have opted for the FNB’s cash deposit TFSA offering with 16% investing in the tax-free shares account. “What we however can’t tell you at the moment is whether this is new money – as in new savings habits/culture – or if this was money already lying elsewhere.”
Standard Bank’s findings show that only 9% of customers have contributed the maximum R30 000 allowed annually and 70% hold balances below R5 000. Of these, low-value, high-volume investments were skewed towards the lower- to middle-income groups, while high-value, low-volume ones were skewed towards prestige and standalone investments.
Giessing says PSG’s data show that most clients have made use of the full R30 000 annual limit. He feels that if the annual limit were increased, people would be contributing more. He believes that TFSAs are attracting new clients as a substantial number of the accounts opened were for children.
Traditionally viewed as serving the lower-income segment, African Bank has experienced a negligible uptake in it TFSAs, which curator Tom Winterboer attributes to the bank’s entry-level clients preferring products with greater flexibility.
He says the bank’s 12 month tax-free fixed deposit account has not attracted the volumes they would have liked. “We find, especially with our entry-level clients, that they are more interested in products that give them greater flexibility and access to their funds, like the traditional notice deposits which earn a lower interest rate range than the 12-month fixed deposit but can be accessed earlier.”
Feedback from African Bank clients, says Winterboer, suggests that greater control and access over their savings is of great importance, thus products where they can access funds more regularly are preferred. African Bank is also still busy in a process of curatorship since August last year which could discourage clients.
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