THE South African government is dangling a carrot in front of South Africans, hoping to boost the savings rate in the country.
08 October 2012 | Jeanette Clark
As promised in the budget speech in February this year, National Treasury has published a discussion document on proposals for a non-retirement savings product, which is supported by tax incentives.
Petar Soldo, director of TMS30X30, a research company with extensive knowledge in the financial services industry, says the company has seen from research in the past that incentives such as those proposed by Treasury do not have the desired outcome, simply because they do not really address the key issues that are driving a lack of a savings culture in South Africa.
“Tax benefits are only a driver for a very small part of the market. The current reality is that most South Africans are not saving and of those that are, most do not currently save enough to make use of the current interest exemptions so changes to this will have little impact,” Soldo said. He said you only had to look at a past government initiative such as Fundisa, which was meant to encourage educational savings, to see that it hadn’t worked in the past.
“Even the RSA Retail Savings Bond has benefited mainly the wealthy and not done enough to change the savings culture in SA,” Soldo said.
In the discussion paper Treasury notes that South Africa’s low savings rate is a policy concern, “both in terms of individual household savings and the overall national savings rate”. Treasury argues that not only will better savings reduce the vulnerability of households, it could also help the country with its current account conundrum where the country currently relies heavily on volatile capital inflows.
According to the paper South Africa’s current tax-free interest income thresholds, aimed at incentivising non-retirement savings, cost the fiscus over R3bn in the 2008/09 fiscal year.
“However, the thresholds are not visible enough and restrict investment options to those that are interest-bearing,” Treasury said.
The paper then proposes to expand the offering beyond interest bearing accounts to equity accounts as well and even possibly to collective investment schemes that directly own property. This will mean a range of Collective Investment Schemes (unit trusts) will be included, as well as savings accounts offered by banks and retail savings bonds. The savings vehicles will have to be registered with SA Revenue Service.
On a macro level what the proposals entail is to propose tax free returns, growth and withdrawals on savings, limiting contributions to R30 000 per year and R500 000 over the lifetime of an individual. Treasury states that these limits may be adjusted from time to time to take into account inflation.
“During a transition period of two years from the date of implementation of these proposals, taxpayers aged 45 to 49 years may be allowed to invest up to a quarter of their lifetime limit, those aged 50 to 59 years to invest up to half of their lifetime limit, those aged 60 to 65 years to invest three quarters, and those above 65 may be allowed to invest up to the full lifetime limit,” Treasury said.
Gavin Came, chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern African (FIA), told CitiBusiness on Friday that the association has not gone through the various documents released by Treasury in detail and will only discuss it at a meeting in about two weeks’ time.
He did comment to say that he does believe Treasury might be trying to reinvent the wheel with some of the proposals.
He added that in another discussion paper regarding post-retirement savings and living annuities that the specific document was “full of a lot of untested assumptions”, many of which, in his opinion, was wrong.
Soldo told CitiBusiness that it seems as if the proposed changes also do not address some of the fundamental barriers to saving that exist in South Africa such as levels of education and that people cannot afford to save, which is driven “by the realities of life in South Africa like massive increases in electricity costs, petrol and transport, education, medical aids etc”.
The public have until November 30 to comment on the discussion paper. –