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How South Africans invest in tax-free savings accounts

Life insurance policies most popular during initial phase – study.

JOHANNESBURG – More than half of the tax-free savings accounts (TFSAs) opened in the first four months after the regulatory launch were life insurance policies, new research shows.

A study released by independent information forum Savetaxfree.co.za suggests more than 52% of the TFSAs opened by the end of June this year were life insurance policies followed by stockbroker accounts (23.9%) and collective investment schemes (23.5%). As most banks were hesitant to reveal information due to competitive concerns, they were excluded from the study. Volumes are displayed in the graph below.

Screen Shot 2015-10-06 at 4.11.18 PM

Source: Savetaxfree.co.za

Conducted in July and August this year, the study compiled data based on questionnaires completed by 18 institutions that offer these accounts. The authors estimate that the sample covers over 90% of the TFSA universe by assets. The study provides insight into some of the early trends related to this new market.

Stuart Theobald, Intellidex chairman and one of the analysts involved in the project, says the number of investors who chose some form of life insurance policy was surprising. This is largely due to the distributional strength of large life insurers.

While the study does not provide a breakdown with individual volumes for each service provider, an earlier Moneyweb article highlighted how Old Mutual’s aggressive TFSA advertising campaign has paid off.

“Saving through a life policy has a couple of advantages over other types of accounts. For one thing there is some protection from creditors as in the event of insolvency life policies are typically ring fenced from the rest of your estate. Also when you die the proceeds are paid to beneficiaries without the delay of waiting for your estate to be wound up or executor fees being levied on the amount.”

But life insurance policies are also more expensive and for people who are not saving for the purpose of leaving money to others, this is probably not the best option, he says.
 
“I think largely that number is driven by the efforts of the life insurance companies to get their broker networks to sell these products.”

Excluding bank deposits, 35 384 TFSAs were opened by institutions by the end of June. Total assets amounted to R284.31 million, implying an average account value of R8 035.

Screen Shot 2015-10-06 at 5.32.30 PM Screen Shot 2015-10-06 at 5.32.21 PM

Source: Savetaxfree.co.za

While it is difficult to make any meaningful conclusion on the early success of the programme based on volumes, Theobald describes it as a “pretty good start”.

TFSAs were first introduced on March 1 this year and offer individuals an opportunity to invest up to R30 000 per annum in one or more TFSAs (collectively) up to R500 000 over their lifetime. All proceeds on the accounts are 100% tax-free. The incentive follows similar regulatory reforms in the UK and is an effort to encourage South Africans – especially lower and middle income groups – to save and to reduce the financial vulnerability of households.

First time savers

According to the study, product providers consider 11 374 investors (32%) to be first-time savers.

Theobald says the whole purpose of the incentive is to teach people to become savers rather than to continuously incur debt. The fact that first-time savers have opened almost a third of the accounts is a positive development.

“All saving is easier if you have a lot of money, so one would expect people who have existing savings to be the ones who are most easily able to open these accounts. But the fact that a third has been opened by people who didn’t have existing savings products I think is a good result. It means that those people are doing something for the first time that is changing their behaviour,” he says.

According to the study 20% of clients (7 092) invested the maximum annual limit of R30 000 on opening. Product providers expect another 42% (14 730) of the investors who have opened accounts to reach the annual cap by the end of the tax year.

Are affluent investors really the ones who are reaping the benefits of a policy that was aimed at lower and middle-income earners?

Theobald says at an annual limit of R30 000 the benefits – even when the full amount is invested – are not that significant. The average salary for employed people in South Africa is about R15 000 a month and saving R2 500 of this, would be doing well.

“The regime caters for that average person quite well.”

Concerns

Although product providers have lobbied for tweaks to be made to the regulations, the research suggests the introductory phase has largely progressed well.

Theobald says there are views in the market about tweaks that could be made to the regulations around the products. A number of participants feel the annual limit is too low and could be increased. Some believe different assets should be allowed in the accounts – particularly direct exposure to shares (currently this can only be done through exchange-traded funds). Life insurers also want to be able to include things like smoothed bonus portfolios for risk-averse savers.

Lobbies to widen the scope of assets that can be held should be expected, but ultimately it will be up to National Treasury to decide how to respond.

“The ambition has always been a fairly simple product that everyone can understand and from what we’ve been able to determine, that is what is happening.”

However, there is clearly a need for more education about savings in general and it is difficult for the industry to take that on its shoulders. Providers are incentivised to attract customers to their particular products rather than to promote the concept as a whole, Theobald says.

Government has some responsibility to explain the regulations and the regimes to the country – particularly to less sophisticated lower income consumers who aren’t necessarily consuming financial media, he says.

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Good article! – What about a follow up article on the costs of collective investment scheme vs. stockbroker accounts vs. life insurance ?

Hi, which is better, “invest” R30k in my home loan or invest in a TFSA?

No brainer! Pay off your bond. It is equivalent to a guaranteed short term interest bearing tax free savings @ 9.5% or whatever your personal bond interest rate is. There are no short term TFS paying interest @9.5%. Should your time horizon be 5 years and longer, then perhaps at TFS linked to a low cost high growth portfolio MAY be better…but with market risk.

But of course Life Insurance policies dominate the sales. There are insurance salespeople running around selling these policies like hot cakes…all for the commission / fees that include upfront and ongoing fees. Such fees in most instances, nullify any tax free advantages. Let’s watch as the lapses roll in once people discover that they have been duped. National Treasury made a mistake by allowing insurance products to be used. They were probably coerced into such a decision by the big 5 insurance companies AKA product floggers. There are much cheaper options available such as via Easy Equities, Sygnia Asset Managers and others available direct and online. Any challenges?

As a financial planner I’m embarrassed by the numbers above. It again shows that most so called ‘financial advisors’ just work for commission. I have done several TFSA’s and they have either been unit trust or Satrix TFSA which has virtually no commission or cost.

The ‘reduction in yield’ or cost associated with the life product is astronomical and can never justify the savings in executors fees.

One could equate the effect of the tax savings as an increase in yield which is an advantage. But then as you have stated the reduction in yield could effectively wipe out such advantage. I saw a quote last week from company D with a commission or fee if you prefer to call it at the rate of 5%. That borders should be prohibited.

correction should read “That should be prohibited”

So life policy “floggers” have stolen a march on other types of provider! I bet there is quite a lot of up-front commission being paid on these (not yet illegal but certainly unfavorable to the investor). They will soon start moaning if and when they find themselves in need of cash and have to surrender these policies. They will lose heavily during the early years of the policy. It’s not only the commission recovery but all the other up-front costs of the policy. Life insurance should be sold as such, including disability and dread disease cover. It’s not a good plan to use them as endowment policies.

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