So although the introduction of these accounts provides the first steps of encouraging a savings culture, how can individuals be further enticed to use these accounts knowing that the real tax benefits to new savers only come to fruition after several years of investment?
What should these accounts be used for?
A recent study by University College London has suggested that the secret to a longer life is for individuals to have a sense of purpose and meaning to their lives. The research indicates that those individuals who feel they have a purpose also appear to survive longer. That link can be easily understood and reasoned with and similarly those principles can be easily linked to savings. Many people begin with good intentions to save but at the first signs of difficulty, or perhaps when the first sale signs hang in the shop window, those savings are depleted in favour of immediate spending. But if that savings account had a purpose, a realisable goal for the individual to strive for, this may see the savings survive for longer. No longer is an individual just choosing between adding or keeping funds in their savings account compared to their latest expenditure, now the decision is between spending now or remaining committed to achieving a long-term goal they value and can visualise. A face has effectively been put on the savings account rather than it being viewed as a delay in consumption. These savings now have a meaning and purpose.
The employer angle
The 2014 edition of Benefits Barometer provided a sobering insight for employers: the retirement savings and employee benefit systems that were an integral part of their compensation packages were failing to provide employees with critical financial protection.
Getting members to appreciate the importance of preservation and the purchase of adequate income protection both before and after retirement has proven to be a monumental challenge.
The reality is that for many employees, securing their day-to-day financial well-being simply takes precedence over saving for the future. Employees are also not fully cognisant of the value of the income protection offered to them as employee benefits. When families become financially stretched, cashing out of their retirement funds is often their first port of call.
The conclusion drawn by the Benefits Barometer research was that if we want South African workers to take their retirement plans and employee benefits seriously – and it’s clearly in the interests of both National Treasury and employers that they do – then we need to help them become resilient to short-term financial crises.
This is where the new tax-free vehicles being promoted by National Treasury can play a critical role. The value of these vehicles can be understood on two levels:
1. By providing a parallel investment to a retirement savings and employee benefits plan, they can provide the all-important ‘savings safety valve’. If a crisis does materialise, these savings vehicles can provide the first line of defence for a family. However, remaining invested for the long term should be encouraged to get the benefits of compound interest and tax. Any amounts withdrawn cannot be replaced due to the annual and life time limits.
2. By linking these savings vehicles to specific financial goals, research suggests that investors will tend to exhibit a far higher level of commitment to the specific savings effort. Examples of compelling goalsbased savings incentives could be:
a. To save for a child’s education at a specific date in the future
b. To provide an additional savings protection against escalating post-retirement healthcare costs
c. To provide for frail-care housing post-retirement
d. To secure housing in retirement after one has been living in company-sponsored housing during one’s work life.
National Treasury has provided a vehicle to help individuals drive towards these goals and provided an incentive. Attaching an appropriate goal to this vehicle will help improve the take-up of the incentive on offer. The real benefits of the tax-free savings accounts are felt in the longer term when the benefits of compound interest come through. For this reason it is most suited for individuals who can attach the savings account to a long-term goal with savings terms of at least 8 years. These goals may include saving for your child’s university education, a supplement to your retirement funding or post-retirement medical expenses, or that trip sailing around the world when you finally have the time to do it.
We have been given that first step and initial incentive to begin saving by government. It’s now up to us to ensure we remain committed to the long-term saving plan to reap the benefits of those incentives. Linking savings to a purpose will help make that longterm savings journey easier, and having a purpose for one’s savings may just lead to having a longer life to enjoy the fruits of those savings as well.