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Interrogating TFSA – what we have learnt

Simon Brown and Christo Davel hash it out.

Tax Free Savings Accounts (TFSA) were introduced earlier this year amidst much fanfare but do South Africans actually understand these vehicles and how they can use them to meet savings goals?

Moneyweb and 22Seven hosted a webinar on Monday with Simon Brown from Justonelap.com and Christo Davel from 22Seven. Listen to it or read the transcript below:

 

SIMON BROWN: Afternoon Ladies and Gents, it’s Simon Brown here, I’m doing the Q & A with Christo. So it will only be about 20 minutes, I’ve got some questions for Christo as well but if you’ve got more questions let us know. We’ve certainly got some time here. Joined as I said by Christo Davel, he’s a CEO of 22seven. Christo good day, thanks for joining us on the line.

CHRISTO DAVEL: Hello Simon, it’s a pleasure, thanks for having me.

SIMON BROWN: We want to talk tax free, I want to talk 22seven as well but before we get to that I suppose a quick recap. The tax free savings account which is really what we’re going to be looking at today came into effect 1st March after the Minster Nene, it’s the limits of R30,000 per individual per year, R500,000 over a lifetime restricted in terms of products, collective investment schemes are part of those products, if we step back, if you look at the idea behind the tax free savings account and in particular how they’ve been put together, what’s your sense of them?

CHRISTO DAVEL: Well I think it’s an unbelievably timeless thing to get the average Joe in the street to start saving more and that was the intent of the South African government and we’re following behind what’s known in the UK as ISAs (individual savings accounts). So I think it’s just also that we now have very simple legislation to encourage people to put money away and not be taxed on that…

SIMON BROWN: Is the tax…one of the issues I had with it is that, do people really wander the streets of Cape Town, Johannesburg and everywhere in between saying ‘ooh I pay too much tax’. The tax is a great product, make no mistake we do great from the savings in tax but the focus really is on the savings part and the tax almost like a cherry on the top?

CHRISTO DAVEL: No I think you’re 100% right Simon, I think the fact that there’s a tax benefit is not going to make the person that’s not saving say there’s enough. So you’re right that is probably where 22seven’s mission is that how do you get people to understand how to manage the money, how to make smarter decisions and free up money to put away because the main thing is not how much you put away or that it’s tax free but you are saving money for the future.

SIMON BROWN: And it’s that and it’s almost a sense…I’m a huge fan of 22seven as a product, it’s that fire and forget nature almost of it. If you can get that discipline, work out a budget in many cases its working that budget first. I always say to folks you know, wealth creation is easy, just spend less than you earn, that perhaps is the hard part of the process, is getting to the point where we do spend less than we earn, then we can sort of fire and forget on the savings?

CHRISTO DAVEL: But we’re not normally wired to do that as human beings, we’re not wired to think long term and we live in a world of instant gratification and it was one of the founding principles of starting to save…how do we marry the fact that we as human beings are emotional that we worry about today and not about tomorrow. And to put it in a way that people can see the impact of putting money away now. So it’s an ongoing journey and I don’t think there’s a right or wrong… the aim from 22seven…just make it simple for people to see the impact of putting money away and the fact that they can do it. It’s not only the select few that have extra money available, but if you are smart with a sense of understanding where your money goes and making some small adjustments you can have money to put into the future.

SIMON BROWN: Those adjustments are small…I remember interviewing you when 22seven launched and the one story, and I can’t remember who’s story it was, but around the amount of money being spent at ATMs by using your non-bank ATM and it might only be R15 a shot but they add up and then you throw in that extra cappuccino you have on your way to work every morning, in many cases savings is as often – it’s not the big ‘I must save R1000, it’s little bit here, it’s a little bit there that starts to add up.

CHRISTO DAVEL: Exactly and that’s again as you said…when back, it must be about three years ago when we spoke but the aim is to make sure that people understand that it is possible and those small little things that you’re not aware of, if you just make that happen automatically, before you know it you have a couple of thousand rands available and to make it simple to people to put it away is our mission. You know I think one of the problems that we as normal people have been faced by is the fact that it seems to be complex to put money away, yet you have so many options to look at and if you can demystify that and link that with ability to just get budget smarter, I think there again lies the secret… making it easy for people to put money away.

SIMON BROWN: And that part of the secret are the tax free savings accounts in that they are typically simpler products, they’re going to be collective investments schemes, be that unit trusts or exchange traded funds…they’re getting to be a much simpler product, we can see it, we can get a sense ‘this buys us the South African market’. We might not know the nuances, we might not know the PE levels or anything but we understand what the JSE is, we know that there’s a stock market and it’s the big retailers who spend our money at every week and the like, it creates that simplicity and I suppose that’s part of what government is trying to achieve, is to make it simple.

CHRISTO DAVEL: Yes and I think there’s a subtle nuance in that Simon. You talked about simplicity but for me…what we’ve made abundantly clear in our place this year is make people understand that…be part of the economy, not just a consumer of the other economy, be part of the world and what they’re doing out there and demystify it. You know I’d rather invest in the market than in purely cash, I think that’s one of the things that we’ve always had as a problem, because people think that to save cash is good enough, you know…it’s a guaranteed way of displaying their capital. So how do you make sure that people see that and the option that they have to play and invest in equities is simple, and that …we are big fans of index funds you know, so that same again… [Indistinct] used to say just make sure it’s a low cost broad based index fund and that’s what we try to make simple for people. The option is not the tax free, it should be, you should…it’d be silly for anybody not to maximise that tax incentive that’s given to them, but make sure it goes into a low cost broad based index fund. That is the message we’re trying to convey.

SIMON BROWN: That’s a good point…we’ve talked indexation and that’s critically important, certainly we’ve seen over the last 10 years that the progression of costs has been downwards and I still think there’s potentially space to move further down but we’re now really talking costs on the margin, but those costs on the margin over the long term still have an impact and still is about don’t go and pay 3%,4%,5%, heck don’t even pay 2% in terms of annual fees?

CHRISTO DAVEL: Well it is you know, we always have the challenge of how do you simplify compound interest and let’s show people the benefit of that but the downside of that is as bad. The compound effect of excess fees it erodes people’s investment and I think the transparency as it is, people can see anything they want on the web, people can access information and so it’s becoming more and more prevalent for people to understand that why do you pay excess fees. And we know that what’s happening in the US for instance where costs have been driven down dramatically. So I think that we’re going to follow that and that’s going to be the next couple of years, there’s going to be more awareness of the ability to still play in equities and just not pay an arm and a leg for it.

SIMON BROWN: A quick point coming through from Richard, he says he’s an Asset Manager in Cape Town, he says uptake of TSFs (Thrift Savings Funds) has been okay but a recurring issue is that people are under the impression that because it’s called a savings account you can only get it through a bank and that it really is for sticking cash in it and that perhaps is a branding issue with Treasury and with respect to Treasury branding is not what they do, they collect taxes. But certainly I’ve had some folks who’ve kind of thought that it really was just going to be a cash account and it really isn’t. But pushing cash in there for 17 years is defeating the purpose of the process.

CHRISTO DAVEL: Completely but I also don’t think that’s the government’s responsibility. It’s our responsibility of the industry to make sure that people understand the smart options available, that it is from a long term perspective it’s really silly to put your money in a cash account and again it’s our job. It’s our job to make sure that marketing is done clearly, that the message is very succinctly explained that you know…if you want to save money for anything longer than three – five years, for heaven’s sake get it in equity and that’s where the benefit should be explained clearly. Not that it’s only a cash option. I really think it’s our, as I said, it’s our responsibility not the government’s to do marketing properly.

SIMON BROWN: So let’s talk on outtake. I mean 22seven obviously at the forefront of consumer, in that space, you’ve already got a bulk of account, has uptake – has interest been positive, has it exceeded expectation from your perspective?

CHRISTO DAVEL: Well, it has exceeded from our side because it wasn’t a big message for us. You know.

SIMON BROWN: Sure.

CHRISTO DAVEL: We are busy establishing a platform for people to do some completely online, mostly on their mobiles, so that is our amazing venture, that is to make sure that the people understand how easy it is to be in touch and in control of their money. So the fact the we’ve added this tax free savings account from 1 March was not to have the first option people can start acting once they’re a player on the 22seven platform, so I’m overwhelmed by the response we’ve had, and we’ve brought in a good percentage of mutual groups take up on the TFSA, but I still believe its early days, the fact that it’s been made available by the government legislation on 1 March, I foresee … a lot of people to rush into the market. Actually, to the contrary what you’ve seen in the UK it’s probably towards the end of the tax year that there’s a lot more marketing activity, a lot more awareness of it, so I expect that to happen early in the new year, we’ve had a lot of money spent on advertising to make sure people are aware of the – to save some money…

SIMON BROWN: And they can put their R30,000 in, I agree with you, I think come, sort of post the Christmas card, hangover blues, we’re going to start to see a lot of push in that sense. A good point made by Christopher, he says there’s still a lot of people are uncertain, retirement annuity or TFSA, my sense it’s not necessarily an either or, to me it just if you can maximise both. Christo, your take on that?

CHRISTO DAVEL: I agree with you completely. It’s not a case in the one, you don’t get tax free, you don’t get tax deductions up front like you do in an RA, so I think if you have the money available it’s better to maximise both.

SIMON BROWN: Yeah, put them into both if we can. You also spoke, and you said that, you know, we’re going to see the big push, I think in January, February as we come to the end of the tax year and the question was coming through, those limits, what is the year? It’s not a calendar year, it is your tax year, so it’s 1 March to 28 or 29 February depending where we are in terms of leap years and the like. But what I’m seeing from it is a lot of folks thought what we’re going to see a lot of really exotic product and the like and in fact someone on the webcast is saying the products are boring. Christo, I think boring’s exactly what we want here, isn’t it?

CHRISTO DAVEL: Well, yes and no. I think there could have been some simpler products so if you mean by boring simpler I’m all over that. But boring that it doesn’t make any sense or difficult to understand, that we should get away from. So I’d like to think that we’ve from some perspective, we’d made sure that we, you know, we’ve made a…the only big thing that we’d made is the fact that…what people pay on average when they see an adviser. So just to make sure that that comes across. But the product itself is an Old Mutual tracker funds you know and I think it is the simplest and the easiest thing for people to understand.

SIMON BROWN: Yeah, a comment from Richard again. He works in the industry in Cape Town, he says last week of February will not be allowed to have dip funds to be deposited into TFSA as far as he understands. Richard I don’t know about that I will check. Christo are you aware of a limitation in the last week of February?

CHRISTO DAVEL: No, I’m not aware of that.

SIMON BROWN: Ok. Richard, I will take that I’ll go and do some digging. I will go and chat with National Treasury and see what they have to say. Christo, a question coming through around this is that one of the beauties perhaps of these tax free savings accounts is that we can, if we need, draw the money. We certainly shouldn’t, but I mean, sometimes life throws us a complete curve ball, something happens, we can get access to that money fairly quickly if we need to.

CHRISTO DAVEL: Yes, it is and I think that’s the beauty for means someone who’s been in the industry so long is that the flexibility is definitely something fresh and new, and you know, it’s more than taking the money out, it’s almost like what I would love to get people to understand is you don’t have to, if you have a monthly commitment and times get tough or something happens, you can just stop that for a while and pick up again when you’re a bit more cash flush. So it’s got flexibility … in and stopping and taking some out. It’s obviously not in people’s interests to take money out but at least, as you say, if there is a train smash they have access to it, there’s no penalties if you want to take the money out.

SIMON BROWN: So, a question coming through from Ryk, and it’s something that has troubled me, so Christo I’m going to throw it onto your shoulders. Maybe you can help me here. So I’ve got a niece and nephew, they’re 5 and 7 years old. I buy them ETF’s for Christmas and birthdays and stuff, I don’t buy them toys and that’s doing lovely and the question is, do I put this into a tax free savings account for them? And I’ll tell you why I’m holding back, because let’s say I do put in a TFSA and they hit 20 and they’re now, let’s say they’ve maxed out in terms of it, and they take that money out for varsity. Now they’re 20 years old, they’ve got a varsity education but they’ve lost their, the rest of their TFSA for the rest of their life which has made me think, maybe not to use education for TFSA and rather let them do it when they hit their working career.

CHRISTO DAVEL: Sure…I think you’re looking at all sorts of education, there’s not a lot of Simon Brown’s around who buys their nephews and nieces…..

SIMON BROWN: Well, I’m lucky, I don’t have kids, I only have a nephew and a niece so it’s easier for me.

CHRISTO DAVEL: But I, you know for me there’s you know the first point you made in this conversation was that the important thing to do is to put money away.

SIMON BROWN: Ja.

CHRISTO DAVEL: The fact whether they have a TFSA or an RA just for heaven’s sake, put money away, you know, and if you don’t have an adviser I think it’s already starting, its more and more transparency about what are the rules that people can do and you know, if you look at the… they have access to information, they need…you can’t pull the wool over their eyes with complexity, that’s what I love about where the world has gone.

SIMON BROWN: Yeah. Ryk, what I’m actually doing at the moment is I’m not using the TFSA for my niece and nephew for that simple reason that it’s only going to be a 15 odd year investment and in the big picture of what I think a tax free savings account is about, I think 15 years is too short. I think they’re better off if they start fresh at age 20, 22 whatever, when they get their first job, and then they’ve got 40 years and those 40 years then becomes massively, massively significant in that space. Christo, you know a last question and then I’m going to leave it there. A couple of folks have said, ah, but the limit, R30,000 a year, R500,000 a lifetime are too small. Now in truth that’s a 1% of problem. For most people, I think R30,000 a year is R2,500 a month, I think that’s a lot of money. Would you expect to see over time treasury to slowly increase those levels much as they used to do with, for example, the interest that we could take tax free?

CHRISTO DAVEL: I think, I have a suspicion that they will slowly increase.

SIMON BROWN: Yeah.

CHRISTO DAVEL: I don’t know for a fact but I think it will and that your first comment was an amount a R2,500 a month that for an average South African is 10%.

SIMON BROWN: Ja, and if every South African was saving R2,500 a month, this place would be something, oh, you would be teaching the entire planet how it’s done, for most folks it’s a giant chunk of change. I’m going to leave it there I’ve been chatting to Christo Davel, CEO of 22seven, that’s 22 numbers seven as in word, 22seven.com. If you haven’t go and give them a check out, they’re a great site, I use them just to see where my money goes, because I tell you what, we leak money and it might only be small amounts here and there but I discovered how much I pay for my private bank and I tell you what, for the one or two phone calls a year those are incredibly expensive phone calls I get. But we leave it there. Christo I really appreciate the time today. Ladies and Gents, really appreciate it all.

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