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Newly-introduced tax breaks are intended to benefit lower-income earners who, for example, can put aside R100 a month. The maximum investment value for this sector is R30,000 a year – with the lifetime investment capped at R500,000. However, says FedGroup financial director Scott Field, such tax-free vehicles are swiftly eroded by bank charges, which are in some cases excessive and strangle what could otherwise be an opportunity for small-scale savers to enlarge their capital base, narrowing the wealth inequality all agree is a halter on SA’s economic growth. The answer, Field proposes, would be a thorough investigation of the scale and utility of bank charges that would include their impact on the alleviation of poverty. – Peter Wilhelm
(Fin24) – Exorbitant bank charges are scuppering all intentions of using tax-free savings to benefit low-income earners and address the poverty cycle. This is the analysis of FedGroup financial director Scott Field issued on Wednesday. He warned that bank charges erode investment values, making the intended small investments unfeasible.
“Although hoping to target individuals who can afford low monthly savings, such as R100 per month (which is the spirit in which the tax breaks were conceptualised), tax-free savings products miss their mark. The biggest hurdle facing this market is that individual transactions cost the investor roughly R5.00 in banking fees, charged upfront. So from day one, a R100 investment is reduced to R95, earning the investor, at an 8 percent per annum interest rate, R7.60 for the first year of investment.”
Furthermore: “Assuming the financial institution takes no fee at all, it will take close to a full year of investment to cover just the bank charge.”
Legislation governing tax-free savings products dictates that the maximum investment value permitted per annum is R30,000, while the lifetime investment cannot exceed R500,000. The purpose of such tax breaks is to ensure savings vehicles are feasible for those in lower income brackets.
Field said that while FedGroup applauds this new legislation as an important step towards making formal-sector investments an option for lower-income earners, it does push to the fore the question of whether a review of bank charges should be called for.
He said a number of financial institutions have taken the approach of offering a minimum and maximum once-off investment amount of R30,000. This product requires very little administration, reduces management costs, and is also a figure upon which banking fees will present a negligible percentage.
“This type of investment product, however, can only be accessible to the upper-middle or high earners. For the average South African, a once-off lump sum investment of R30,000 is unaffordable.”
Field said that in the spirit of these new tax breaks, as opposed to targeting the elite who can afford a high-value investment, financial institutions must investigate opportunities that will allow South Africans to take full advantage of tax-free savings products without being penalised by relatively exorbitant bank charges.
“Until such time as banks are prepared to waive charges for tax-free savings, tax-free savings products need to be approached in an entirely different way. To this end, we are engaging with unions, stokvels, and other groups of individuals to create an opportunity whereby individuals who can afford R50 or R100 per month can start building personal wealth.”
Field maintained that establishing a culture of saving and investing is crucial in confronting the country’s poverty cycle.
“Whether providing relief during periods of unemployment or establishing funding for education, individual investment allows the economically disenfranchised sectors to escape debt and build a sound financial future for the next generation. Tax-free saving products need to be a part of this uplifting cycle.”