Tax-free investments a year on: How are we doing?

Tax-free investments a year on: How are we doing?

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After the first year of tax-free savings accounts (TFSAs) becoming available in South Africa, it is clear that the products have been successful in encouraging new investors to save money in investments. As more and more investors become aware of the benefits of tax-free investments, it is expected that uptake of the products will grow exponentially in the next year, particularly for use as a medium-long term
savings account. 

The recently released statistics from the Study of Tax-free Accounts take-up in South Africa, conducted by Intellidex provide fascinating insight into the first year of tax-free savings in South Africa. The study revealed that of the 262,493 tax-free accounts opened in the first year, an estimated 21% of the accounts opened are believed to be opened by first-time savers. 

This is hugely encouraging, not only as an indicator that the initiative to encourage South Africans to save more is working, but also that more and more people are gaining exposure to the benefits of investing for the longer-term. It’s fantastic that so many people are making an effort not to make any withdrawals so far so as to maximise their taxbenefit. 

While we have been impressed by the inflows into tax-free investments at Nedgroup Investments for the first year, we expect the growth to improve significantly going forward. Inflows to our tax-free products were approximately R79 584 916 for the first year (ending 29 February 2016), with a very significant 73% of the accounts opened, being firsttime investors with us. 

A large number of the new accounts were as a result of investors opening tax-free investment accounts for their children and their families. There was also a notable uptick in inflows to tax-free investment accounts – approximately 36% of inflows for the first 13 months in fact - in February 2016; as investors rushed to reach their full allocation of R30 000 per year before the end of the tax year, and again in March; as investors looked to take advantage of the new R30 000 allocation allowance in the new tax year. We expect to see clear growth on the existing funds in tax-free accounts, as well as increased contribution to tax-free accounts as more and more investors start to understand the benefit of using unit trusts as the underlying investments in tax-free investments. 

Currently (as at end June), inflows to Nedgroup Investments tax-free investments is approximately R 123 652 266. 

As we progress further into the second year of tax-free investments being available in South Africa, we also anticipate the increased use of tax-free investment accounts as a savings account. Tax-free investments are a great gateway product that allows new investors an opportunity to learn about how investing with an asset manager works. We have had very positive feedback from our new investors over the past year and as a result, we are expecting active growth in flows to our tax-free products this year. 

Global trends also point to exponential growth in tax-free investments. For example in the UK, ISA investments, which are equivalent to tax-free investments in South Africa, were sitting at just under GBP500 billion at the end of the 2015 tax year. 

Of course one must keep in mind that these accounts were not limited by low annual or any lifetime limits (as tax-free investments are in South Africa), but the popularity of the concept is undeniable. 

A growing concern in the industry revealed by the Intellidex survey is that the life-time limit of R500 000 for allocations to tax-free investments in South Africa could be too low. The concern is that if people do need to withdraw funds (which is a very attractive feature of the tax-free investments), they will be adversely affected by the life-time contribution limits and will not be able to make up the gap created by the withdrawal at a later stage. While at this stage there are no official plans to change the limits, we do believe that this issue will be a feature on the agenda for Treasury in the near future and we will watch developments with interest. 

Importantly, from 1 November 2016, new legislation will come into effect, allowing investors to transfer tax-free investments between product providers that will not be subject to the annual lifetime threshold. This will likely encourage industry-wide focus on positive performance and responsible management of tax-free investments, as inferior products will not be able to retain investors. 

We view this as a positive regulatory development as it will allow a large number of investors who may be sitting in inappropriate products in terms of their risk profile and return objectives, the opportunity to transfer to more suitable products. 

The example below emphasises the difference an investor would have received in returns had they been able to invest tax-free R2 500 per month over the last 15 years in a Fixed/ Notice deposit vs South African listed property unit trusts vs a balanced high equity unit trust fund.


It is thus extremely important to ensure that the tax-free investment product that you invest in is suitable, considering your long term return objectives and your corresponding risk profile. Being invested in the incorrect product could have an adverse effect on your long term returns.