South Africa’s declining household savings rate has been of national concern for some time now – in fact this burning issue has found its way into the annual budget speech year after year. But while initiatives have been implemented to try alleviate the problem – such as the RSA Retail Savings Bonds launched in 2004 and the modest annual tax exemption on interest – our level of saving still ranks in the region of just 13,5%, down from 23% in the 90s.

The intended behavioural shift hasn’t happened, so the question is, will National Treasury’s new tax-free savings account have better take-up?

The simplicity of this latest initiative is what sets it apart. “From 1 March, South Africans can for the first time, open a savings account that will be 100% tax-free. They can access these funds within seven days if necessary, and worst-case scenario will be a R300 penalty for early withdrawal,” says René Grobler, Head of Investec Cash Investments.

Simplicity is the name of the game

Contributions to the tax-free savings account will be limited to R30,000 per individual per year, which works out to a monthly contribution of R2,500. A lifetime contribution limit of R500,000 will be applied, which in today’s value equates to just under 17 years. All returns including interest, dividends and capital gains will be entirely tax-free.

The tax-free savings account offers full liquidity within seven days in the case of an emergency (with a minor product-specific penalty fee possibly applying) without any prescriptive terms and conditions on its usage, as stipulated by Treasury. Importantly, the account cannot be reimbursed with the withdrawn amount at a later stage, thus withdrawals will negatively affect the tax-free growth of the investment over time. Also, one condition will be the imposition of a 40% tax penalty on all capital contributions for those who exceed the annual or lifetime limit.

South Africa’s poor global ranking when it comes to saving has resulted in a population reliant on debt and an economy stimulated by foreign investment rather than internal savings growth.

“As a nation, we need to reduce our financial vulnerability so that we are better able to absorb shocks. From an industry perspective, we see this new initiative as stimulating a virtuous circle – the notion that savings leads to investment growth, which leads to economic growth, more income and therefore better savings ability and so on,” Grobler says.

Can you afford (not) to save?

According to the latest BankservAfrica Disposable Salary Index (BDSI), a growing band of South Africans should be in a better position to take advantage of the tax-free savings account. With formal sector employees’ salaries reportedly having increased by 5% more than inflation – reaching a massive 11.2% more – the BDSI data shows that in excess of 1.1 million employees receive a disposable salary of between R10,000 and R25,000 per month.

Retirement savings still fall significantly short for countless South Africans so the tax-free initiative aims to stimulate saving over and above retirement-based savings. “The tax-free savings account is so accessible and transparent in structure that it really offers an easy, accessible opportunity to better prepare for the future,” says Grobler.

Up until now, South Africa’s non-retirement saving incentives have been limited to annual interest tax exemptions – with these currently standing at R23,800 per individual or R34,500 for individuals over the age of 65. Despite this threshold increasing steadily over the years, South Africa still lacks a culture of non-retirement saving.

“Tax-free savings accounts could provide attractive long-term savings vehicles for the average South African. Importantly, it rewards a behavioural shift towards a savings culture, which is desperately needed in our country,” concludes Grobler.