A good start but TFSAs would benefit from some fine-tuning
Tax-free savings accounts were never intended to be a panacea. However, they were an explicit effort to help transform SA’s dismal savings
Introduced at a time characterised by high unemployment, a volatile economy and a population under severe financial constraints, tax-free savings accounts (TFSAs) were never intended to be a panacea. However, they were an explicit effort by National Treasury to help transform South Africa’s dismal savings culture into a more positive one.
According to research by Intellidex (publishers of this booklet), a little over 260,000 accounts were opened in the first year since their launch in March 2015, holding R2,6bn in assets. In the view of industry participants, that’s not a bad start, but there is hope that many more will sign up in future.
Punching above their weight
The JSE’s marketing head, Mpho Ledwaba, is optimistic and feels the JSE has punched above its weight with limited resources to promote stockbroker accounts as the ideal TFSA mechanism
(see page 4 for details on different types of TFSAs). “With that said, we are still hoping for more, especially considering how tax-free savings accounts present a good proposition for anyone who
hasn’t invested or dabbled with the stock exchange before.”
Ledwaba feels the simplicity and immediate benefit of TFSAs could be used as a learning curve for new investors and
subsequently serve as a stepping stone to other investment products.
Denver Keswell, Nedgroup Investment’s senior legal advisor, echoes Ledwaba’s confidence, saying he is comfortable with the number of accounts opened in the past 21 months, which saw
Nedgroup experience 106% year-on-year growth since March 2015.
On average, Nedgroup has seen a ratio of 1.8 accounts per new investor. It expects that the number of people saving in TFSAs
will continue to increase significantly this year as consumers become more aware of the new savings vehicle and its associated
Room for improvement
Absa Stockbrokers’ head of digital for wealth and investments, Ridwaan Moolla, feels there’s still much room for improvement. Moolla is not satisfied with the numbers, especially those pertaining to stockbroker accounts, which totalled just under 35,000 of the 262,493 accounts opened in the first year.
“As we are here to help clients invest and believe the starting point should be the TFSA, we believe that this is still a very
Moolla believes that while they’re confident their TFSA product offers great value for money, feedback suggests clients still assume that investing in a TFSA is costly, a perception which he says the institution is working on changing. “The showing, in general, of stockbrokers goes to show that the public still does not have a clear understanding of the difference between savings and investing,” he added.
Perceptions of JSE
Stockbrokers are tackling a perception that the JSE is too expensive and complicated for ordinary people. Both Ledwaba and Moolla agree that consumer education is key. Besides the online modules offered by the JSE, Ledwaba says the institution has gone on an aggressive drive to market TFSAs at different
exhibitions. These are unlike the type of exhibitions the JSE would normally participate in, such as the Career Expo, reaching over 2-million people, the MyBiz Expo with approximately 60,000 people as well as roadshows for stokvels. “These aren’t your typical finance expos, dealing with investing, so we’re reaching out to a totally different and broader market. While the information is education-based, it is also geared towards driving people to engage with us.” he says.
Moolla says Absa is among the few brokers offering free education and research to both clients and prospective clients. He says transparency on costs and the fact that their TFSA offering has been designed to be one of the cheapest in the
market reflects the way Absa has tried to make the product appealing to ordinary South Africans. From 2017 the bank will be
giving guidance and recommendations to clients who are not sure what to invest in.
Another issue is the tendency of clients to go for low-risk cash deposits with banks, rather than higher-risk, but potentially higher-return, investment products. While Nedbank does offer a
cash product, Keswell says Nedgroup Investments hand picks independent asset managers in each fund category and partners with them to offer a range of expertly managed collective investment schemes (unit trusts) across all asset
classes. “Our TFSA solution consists of our full range of unit trust products offered at no additional fee.
“We do believe that potential TFSA investors should explore all types of TFSA products and choose the one most appropriate for them,” Keswell says. “Our view is that the TFSA investment must suit the consumer’s objective for the savings and accessibility to the savings, as well as whether or not the consumer has appetite for risk, return expectations and requirement for any guarantees. Unit trusts are a flexible, cost-effective and well-regulated option for consumers, making them an ideal vehicle for longterm
savings. They also provide access to a wide range of funds that suit the consumer’s individual risk and return needs,” he says.
Moolla believes the TFSA product offers clients huge benefits in terms of long-term growth and that, for the first time, clients
can see for themselves how big these are when all forms of taxes are taken out of the equation. Over and above this, he feels this is a great way to ease investors into the stock exchange without taking on too much risk and costs.
A volumes game
Ledwaba feels the JSE has seen a mixed bag of reactions, where traditional brokers who’ve relied on high net worth and institutional investors have shown little appetite for TFSAs. The newer, less traditional service providers on the other hand understand that by bringing in volumes, you can introduce new clients into more complex forms of investments as they mature.
Nedgroup, says Keswell, take its stewardship responsibility very seriously. He believes accessibility to this investment option and the tax benefits ultimately provide the opportunity for account
providers to leave consumers in a better financial position when they need access to their investments. With this in mind, investing time and resources into making the option available to consumers was never a question for Nedgroup Investments.
Referring to Intellidex’s research showing that 21% of TFSA account holders are first-time savers, he suggests that regardless of the debate about who is benefitting the most from a tax
perspective, Treasury’s vision to increase saving among South Africans is slowly starting to bear fruit.
Change the rules
However, many in the industry want to see changes to the rules around TFSAs. The JSE’s Ledwaba says they continue to engage with the regulator. “As things stand, we can only do ETFs. You find some people don’t even know what an ETF is. Or some want to purchase single stocks. So we’re engaging with regulators to try and come up with ways to do this while staying within the current Regulation 28 [of the Pension Funds Act] ambits that
emphasise diversification. All of this while trying to demonstrate to them that we can do this, which would probably also allow
us to achieve way beyond what we’ve already been able to achieve within the current regulations,” he says.
Absa’s Moolla views the main issue as having more to do with the product’s marketing, stating that this should be better and wiser, going forward. He believes that over and above talking about
TFSAs, the industry should be breaking them up into the different options to demonstrate to clients all the options
available to them.
Moolla does feel, however, that the annual limit should be done away with. “This limit is causing issues with regards to how we as an industry will manage transfers of accounts [from one provider
to another]. If we have a lifetime limit, that would help much more,” he said.
From talking to potential investors, Keswell believes one of the biggest stumbling blocks to committing to a TFSA is the lifetime threshold of R500,000. Considering investors have only R500,000-worth of contributions to use over their lifetimes, he feels they are reluctant to invest anything if they fear they may need to access the funds in the next year or two, as each contribution reduces the lifetime and annual threshold.
Moreover, any withdrawal taken cannot be replaced without further reducing your contribution thresholds. “If you look at the
ISA, the UK’s equivalent of the TFSA, they do not have a lifetime threshold. People are therefore able to contribute towards the ISA without any fear of accessing their funds a few years later. The lifetime threshold should therefore either be increased or scrapped altogether.”
Keswell says while Nedbank is aware of Treasury’s intention to allow transfers between product providers, this has been delayed a few times, and again it seems the 1 March 2017 deadline may be extended. “It is important to allow investors who are trapped in unsuitable products the opportunity to shop around for products
that meet their needs from a cost, risk and benefit perspective,” he says.