Many bemoan the fact that South Africans don’t save and too readily incur debt. Annually, in savings month newspapers and magazines carry articles and headlines reinforcing the requirement to become a nation of savers not spenders.
In this morass of misery around our poor savings record, a beacon of hope shines brightly. In 2014, and almost every year for the past 5 years, well-motivated and correctly rewarded financial advisers introduced almost 900,000 new monthly paid retirement annuities and endowments (ASISA 2014 statistics) to the various life offices offering these products. In doing so, these new contributors are adding R522 million per month to South Africa’s savings pool. These new savings contracts are added to the, already committed, net value of monthly savings plans introduced in previous years. This is truly a remarkable achievement in mobilising the nation’s savings. Maturing endowments and RA’s the result of decades of monthly savings for millions of people also provide the accumulated capital which underpins the nation’s investment industry.
The achievement is all the more spectacular when one considers the small pool of prospective savers available to be approached by financial advisers. Starting at the top, with about 54 million people in South Africa, of which 38,5 million are too young or too old to work or unemployed, leaves 15,5million employed (Dept. of labour March 2014) South Africans who are prospective participants in a monthly savings plan of some sort. Or are they? To add to the woes of our nation of youth and general unemployment we must consider the euphemistically named “debt stressed” population. According to the SAHRC over 11 million of the 19 million credit-active South Africans are over-indebted (i.e. more than 2 months in arrears with their repayments). One must assume, having implemented the NCA, that the bulk of these debt stressed people are employed. In fact, inexplicably, the credit-active South Africans outnumber the employed South Africans leading one to believe that about 4 million unemployed citizens are credit active! In any event, the best advice to debt stressed people is to pay off debt rather than enter any savings programmes.
So the result is that about 5 million South Africans are potential targets for recurring savings plans. This means the Financial Planning industry successfully persuades about 20% of these prospects per year to implement a new savings plan thus fully covering the market in about 60 months!
So what about the much-vaunted Unit Trusts and Linked investment administrators (LISPS)? Well, total unit trust sales including single premiums represent about a month-and-a-half of Endowment and RA sales at R800 million and LISPS just over two months sales.
Into this juggernaut of savings success comes the tax-free savings plan at just over R2,500 per month, With a lifetime limit of R500,000. How is this going to mobilise savings? Well back to the stats. Of the 15,5 million employed South Africans only 5 million actually pay tax on their earnings. So the tax-free savings plan potentially benefits just 10% of South Africans. These South Africans already benefit from the general tax rebate on interest (R23,800 per year reached with about R250,000 of invested capital) on interest and the Capital Gains tax exemption(R30,000 per year). So the tax-free plan actually benefits almost no one.
Endowments, which gather the lion’s share of the nation’s savings, with just on 600,000 new contracts sold per year, is successful, despite suffering a 30% internal tax rate and a 10% Capital Gains tax rate. The average size contribution at about R550 per month, suggests that many people saving via an endowment are probably not liable for personal income tax and certainly would not be paying a tax rate of 30% or more. The nation’s average tax rate expressed as a share of total wages is about 18%, so endowments are taxed at almost double this.
A better way to mobilize savings would have been to reduce the internal tax rate on the endowments to 18%. The distribution machinery for this product is already demonstrably there and savers arguably are being overtaxed for saving.