Tax-free investments : What’s holding South Africans back?

Lisa Airey, Strategy Analyst at Old Mutual Unit Trusts.

In 2015 the National Treasury looked to incentivise South Africans to save more by providing a rebate on a variety of Tax-Free Savings vehicles. A study by Finscope, a research tool used to assess the utilisation of financial services around the world, revealed that 69% of South Africans had access to formal financial services in 2017, showing a marked increase in financial inclusion.

Lower to middle-income South Africans, the intended target market for tax-free saving vehicles, are yet to benefit from this initiative. This is according to Lisa Airey, Strategy Analyst of Old Mutual Unit Trusts who says, “Impressive rates of financial inclusion points to a picture of indebtedness rather than one of saving and investing. Against the backdrop of a high rate of unemployment and a low rate of formal education, we need to view our low saving rates in the context of complex socio-economic issues plaguing ordinary people.”

Financial inclusion looks to ensure that all households, regardless of income level, have access to appropriate financial services needed to improve their lives. In 2005, the Financial Services Charter adopted a resolution to improve the country’s access to formal saving and investing vehicles, in a bid to improve the financial wellbeing of South Africans as well as address the countries’ weak savings culture.

However, according to the 2017 Old Mutual Savings and Investment Monitor, only 15% of household income is allocated towards savings. Airey says this discrepancy suggests a systemic problem. “The financial services sector invests millions each year in educating the public and its clients on the value of tax-free saving vehicles. However, to increase household savings across all income levels, we’ll need to address a number of key issues.”

Despite eagerness to learn about better money management, Airey says South Africans display low rates of financial confidence when it comes to making savings and investment decisions. “Investing continues to be seen by South Africans as a complex world,” says Airey. “Lower income earners tend to feel less confident about making financial decisions and feel confused or intimidated by financial service providers and the options available to them.”

“The Old Mutual Savings and Investment Monitor (Monitor) has shown that investors continue to feel that financial service providers complicate their offering. Over several years, less than 50% of respondents indicated that they know a lot about financial services while just over 40% said that they are always looking out for the latest financial services products.”

Another big concern is the high rate of indebtedness experienced by South Africans. “The Monitor revealed that South Africans spend 16% of household income on paying back personal loans and credit cards. This leaves little disposable income for saving and investing,” says Airey.

“Debt levels and financial stress continue to be closely linked. The Monitor revealed that 64% of respondents described their stress levels as “overwhelming” with a higher concentration in low-income households.”

Lastly, despite access to a widened social grant net, the poverty rate in South Africa has increased from 53% in 2011 to 55% in 2016. “All these factors, low rates of financial confidence, indebtedness, and poverty, creates a vicious cycle leaving South Africans with just enough money to make ends meet, but insufficient means to build any form of financial resilience or wealth.”

“Only through public-private partnership can we hope to holistically address the underlying socio-economic problems that drive our poor savings culture,” concludes Airey. “While sound policy and the introduction of tax-free savings and investment vehicles are a step in the right direction, the financial services sector will need to augment its offering to meet the needs and challenges of ordinary South Africans.”