National Treasury’s non-retirement savings incentives disincentive saving
- Published on 10 Dec 2012
- 10X
National Treasury wants to curb our addiction to debt and retirement savings to bridge short-term income gaps.
The Treasury also wants to cut South Africa’s dependence on foreign capital inflows to fund investment.
Discussion paper D - Incentivising non-retirement savings – issued in September 2012 proposes a tax-preferred savings vehicle, to “encourage a culture of saving and to generate new aggregate saving”.
Treasury proposes that savers build a financial buffer, to absorb short-term financials shocks and intermittent capital demands. This product must appeal to lower and moderate-income taxpayers.
The papery proposes two types of individual savings accounts (ISA): interest-bearing accounts that may invest in bank deposits, retail savings bonds and interest-bearing Collective Investment Schemes (CIS); and equity accounts, which may invest in CISs that hold JSE listed equities and property assets. Savers may hold both types of accounts and switch service providers.
Contributions – limited to R30,000 a year (no rollover) and R500,0000 in total – are made with after-tax money. Interest and capital gains are not taxed, and the money can be withdrawn tax-free at any time. As an offset, the present interest exemption of R22,800 pa will be phased out over two years.
Steven Nathan, CEO of 10X Investments, likes the concept, but disagrees with the interpretation, restrictions and proposed phase-in terms.
“The ISA gives savers flexibility and certainty, knowing their savings have no tax consequences and may be withdrawn at any time. But the proposed design prejudices current savers and is goal-defeating,” he says.
Treasury argues the present interest concession is not visible, does not lend itself to “active marketing” and does not encourage “saving among low to moderate income earners taxpayers”
But according to Nathan, “these income groups have little capacity to save, and are unlikely to pay tax on any investment income they do earn at present. The ISA will not be relevant to them.”
The present R22,800 interest exemption presently shields approximately R500,000 of cash savings. But this incentive only benefits those who are already saving, and who, more likely than not, fall outside the target demographic of this initiative.
Treasury proposes to phase out the exemption over two years. But at current interest rates, it will take approximately 14 years to match the value of the present interest rate exemption.
“Treasury’s message is that current savers need no incentive to do so. This may be politically profitable but it is intellectually bankrupt. It undermines Treasury’s objective to push up the country’s savings rate,” says Nathan.
“It is perverse to tax interest income that merely preserves the purchasing power of money. The interest exemption protected SA savers from this wealth erosion; without the exemption and with real short-term rates negative at present, the problem is compounded. This proposal will discourage saving.”
He also questions the proposed investment options: “Treasury is pushing savers into potentially expensive and opaque investment products. We would prefer to see direct investment categories, such as ETFs and individual shares included.”
He is also incredulous that withdrawn money may not be replaced in subsequent years. Treasury argues that this will ”promote long-term saving through discouraging casual withdrawals driven by problems of self-control”.
But according to Nathan, “the objective is to instil a savings culture. Even the paper concludes that “new accounts will provide an alternative tax-incentivised channel for short to medium term saving, to reduce the premature use of retirement saving to meet consumption needs.”
“The UK ISA – on which these proposals are modelled – imposes no life time limits. That is how it must be. Achieving sober saving and consumption habits must be a life-long pursuit, not a temporary political goal,” says Nathan.
In summary, Nathan questions the intentions behind this discussion paper.
“Many of the proposals appear to have an ideological base.” he says.
He says it would take just a few tweaks to make the proposals credible: “Scrap the life time limit, or at least allow withdrawn contributions to be replaced; accelerate the phase-in during the transition period for all; extend the phase-out period on the interest exemption and allow savers to invest more broadly.”
“As it stands, the implied objective is not to introduce a new savings vehicle, but to remove the existing interest exemption. That will push down South Africa’s savings rate”, he concludes.
For more information visit www.10X.co.za , call 0861 109 109 or contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it. .
