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.
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.”
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.
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.”
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.