What are the saving statistics in South Africa?
The South African Savings Institute (SASI) has noted the December 2017 SARB Quarterly bulletin numbers which show Household Savings to Disposable income at 0.2% per month. This means households are saving 0.2% of their income. This represents a positive savings ratio from the last quarter of 2016. This means South Africans are starting to save again. Debt to Household Income remains stubbornly high at 72.5% in the same bulletin. Although these numbers paint a gloomy picture, they still represent improvements from record highs for Debt to Income of 80% in the second quarter of 2013 and a savings of -2.3% in the last quarter of 2012.
South African households are saving again. By saving, this means that the wealth creation cycle has restarted. Although the numbers are still low, they are moving in the right direction and these numbers represent cumulative efforts by National Treasury and the Financial Sector at large over several years. Many people have also learnt the hard way the importance of saving too!
It is hoped that with the economy expected to recover from 2018 in a five year economic cycle, this bodes well for wealth creation in South Africa. The environment is becoming more favourable to saving.
According to the 2017 Old Mutual Savings and Investment monitor, there is an ever growing “Sandwich Generation” who are saving less and less. The “Sandwich Generation” is those individuals aged between 31 and 49 who are caring for children as well as elderly family. This generation should be saving but most of their disposable income is spent on current financial responsibilities and debt. Many also refer to this phenomenon as “Black Tax”, a non-formal tax on Black South Africans who are still not in the habit of saving, or living lifestyles that encourage savings.
Tax Free Savings
The South Government through National Treasury is trying to encourage individual savings, and introduced Tax Free Savings Accounts (TFSA) in2016. All proceeds, which includes interest income, capital gains and dividends from these accounts is tax free. Individuals are allowed to open two tax exempt savings accounts per year. These accounts can invest in equities, fixed income accounts or both. However, total contributions per year that qualify for an income tax exemption is R33 000 on interest earned, up to a maximum of R500 000 per lifetime, though the account balances including interest can exceed R500 000 in a lifetime. Any amounts withdrawn from these accounts cannot be replaced and still get the exemption.
Tax Free Savings Accounts are part of non-retirement savings and to maximize on the tax relief, it is recommended to invest the maximum amount permissible every year for 15 years and allow compounding to happen and watch your money grow. Please see the graph below that shows the maximum permissible amount invested for 15 years with an annual return of 15% excluding fees and compounded to the 25th year. Over the 10 years (1 January 2002- 31 December 2012) annual returns on the JSE (calculated each month) averaged 18.4% p.a. It is however important to select a Tax Free Savings Account with fee charges that are low.
At an average annual return of 15% per annum, R500,000 invested in a TFSA can accumulate to R1,695,005 in the 25th year. A great Wedding present or a gift to a child starting a new life.
Best Use of Tax Free Savings Accounts
Tax Free Savings Accounts make excellent savings vehicles for education or gifting a child on adulthood, if parents open such an account when a child is born or an infant. Young people starting to save may also find such accounts useful for long term savings. Although these accounts will assist savers who are into the habit of saving already, they do not however change attitudes toward saving.
When not to consider Tax Free Savings Accounts
Tax Free accounts are a financial product suited to provide the foundation to a personal financial planning strategy. Few, if any financial planning professionals can speak ill of TFSA’s. Such is the beneficial gain accrued by holders of a TFSA. However, all financial planning solutions can never be looked in isolation, and at times, for various reasons, the need may be for a single solution. In these instances a TFSA may not be the best solution.
Non South African Citizens or Non-Permanent Residents are not eligible to receive the benefits of Tax Free Savings Accounts. One needs to have a South African Identity number to buy and utilise a TFSA. In the hands of a foreign national, a TFSA becomes similar to a regular savings vehicle with Income Tax liability on acuminated interest income using the standard South African Revenue Services (SARS) income tax tables.
The very nature of a TFSA requires long term investment of plus 10 years. This longer vested period allows the investor to earn interest on the saved amount that would have otherwise been paid towards income tax. This interest on interest is known as compounding and is a very effective way to grow an invested amount. The main ingredient to this formula is TIME INVESTED. Using the earlier example, an amount invested at annual return of 15% will double the principal every 4.96 years. If one is seeking a short or medium term investment, a TFSA may not be best suited for this purpose.
Special Purpose Investments
If an investor is looking to save for a specific purpose such as Retirement, a TFSA may not be best suited as TFSA’s have limitations on the investable amount that can grow tax free. As part of a broader retirement plan, one can utilise TFSA’s but this solution would be highly unsuited as a standalone savings vehicle.
TFSA’s do not have the ability to offer annuity income (regular payments) to any investor that may be seeking an investment vehicle that pays regularly.
TFSA’s can also only be held by juristic persons (real people) making TFSA’s unsuited to corporate savings or even Stokvel Investments. For Special purpose investing, it may be best to consult a financial planner.
Alternatives to TFSA’s
Tax Free Savings Accounts are just one of a myriad of available solutions that allow regular contributions towards a savings goal. Many alternatives are available on the market and alternatives include regular savings accounts, notice savings accounts, retail savings bonds, unit trusts, endowment policies, retirement annuities, stock market investments and exchange traded funds. It is important to set goals and examine your risk profile (acceptance of potential losses) with a professional in order to choose the most appropriate savings vehicle for your purpose.
Most leading Financial Institutions have launched various Tax Free Savings Accounts. These accounts may be branded or named differently but the main feature is the Interest Income exemption. These products are all registered with SARS and the tax free exemption is done automatically. TFSA’s are unique and cannot be ignored in any investment plan and indeed, EVERY South African is recommended to have at least one account in their lifetime.
Since launch, TFSA’s continue to grow in popularity with wide acceptance in the investing community, they also make an excellent “starter” investment solution for the novice investor.