JOHANNESBURG – National Treasury this week dismissed rumours that the introduction of tax-free savings accounts would be delayed by one month.
With less than two weeks to go to the regulatory launch of these accounts, product providers are anxiously awaiting the publication of the final regulations before starting their marketing efforts.
Phumza Macanda, director for media management and communications at National Treasury, says talk that the introduction of tax-free savings accounts would be delayed is not true.
“We will publish the regulations soon,” Macanda says.
But why haven’t product providers started to advertise their products?
Rowan Burger, executive for the large corporate segment at Momentum, says providers are still scrambling to figure out exactly what the rules are as they do not want to advertise and make promises they can’t keep.
Although industry has a fairly good idea of what to expect following the release of draft regulations, the final regulations will only be published by the end of February.
With indications that consumers should brace themselves for tax hikes in the Budget Speech next week, the introduction of tax-free savings accounts offers individual investors an opportunity to access some additional tax savings.
Investors would be allowed to invest up to R30 000 per annum in these accounts. The lifetime capital contribution cap is R500 000. All proceeds (interest, capital gains and dividends) will be 100% tax-free. For more information on these accounts also read articles that were previously published here, here and here.
In contrast with pension funds and retirement annuities, contributions to tax-free savings accounts will be made from after-tax money (typically salaries). Interest and capital growth in these accounts will be exempt (this is also true for pension funds) and withdrawals will be exempt (pension funds withdrawals are taxed).
Burger says one benefit of this design is the element of “tax certainty” – the tax is paid upfront. With retirement provision there is always some legislative risk around the exact tax regime that will be applicable by the time the investor reaches retirement age.
Burger expects the market for tax-free savings accounts to be a “hotly contested space”.
Banks will play a significant role as they are trying to solve their liquidity problems.
Banks have to hold capital against their lending and savings books, but their lending books consist of long-duration home loans while their savings books are made up of 30-day notice deposits, Burger says.
As a result of this mismatch in the duration of the books, banks have to hold a lot of capital, but if they are able to attract some savings money that is more likely to stay invested for longer periods, they can hold less capital against their home loan books.
“For that reason the banks are very excited about this,” he says.
The tax-wrapper the savings account provides will likely incentivise investors to keep their money in the fund for longer than they would on a 30-day call account, he says.
“The banks are going to be very competitive in this space and will probably offer really good rates as a consequence of that because this money is likely to be sticky.”
Asset managers that run unit trust platforms will probably consider offering equity, balanced and money market funds.
For insurance companies the introduction of tax-free savings accounts offers the opportunity to attract new business to replace business that is dropping off and maintain their cost per policy.
Government will also be participating by wrapping retail savings bonds in the tax-free savings account. It wants to keep providers and their pricing honest, Burger says.
But what are the benefits for the investor?
The compounding benefits
If someone contributes the full R500 000 lifetime limit to a tax-free savings account between the age of 25 and 65, the annual contribution would amount to R12 500.
Assuming an interest rate of 7% per annum and tax of 30% on the interest earned in a bank savings account, the investor in the tax-free savings account would be around 40% ahead by age 50 (compared with what they would have accumulated had they invested in a traditional bank savings account where tax had to be paid), Burger says.
Source: Momentum (TESA = Tax-exempt saving account/Tax-free savings account)
“If you roll that forward to 65 all of a sudden that’s 75% [the difference], which is really significant.”
The investor in the tax-free savings account is able to build up a kitty of roughly R2.75 million over his working life, compared with just over R1.5 million had they invested in a traditional bank savings account, Burger says.