The per­fect tax-free sav­ings ac­count?

This year, there was a great deal of ex­cite­ment among re­tail in­vestors with the launch of tax-free sav­ings ac­counts in the mar­ket. looks at the ad­van­tages of one such sav­ings ac­count.

Finweek English Edition - - MARKETPLACE PRO PICK -

when tax-free sav­ings ac­counts (TFSAs) were launched by gov­ern­ment ear­lier this year, there was a flurry of ac­tiv­ity in the mar­ket, with the banks and cer­tain life in­sur­ers bring­ing their prod­ucts to mar­ket quite quickly. Th­ese were launched as part of gov­ern­ment’s on­go­ing re­forms in the financial ser­vices sec­tor, with the aim of incentivising more peo­ple to save for their fu­ture. It re­mains our firm be­lief that a bank TFSA prod­uct is not a worth­while in­vest­ment for any­one with an in­vest­ment hori­zon longer than three years. TFSAs have a nat­u­ral long-term hori­zon as­so­ci­ated with them as there are con­tri­bu­tion lim­its and a life­time limit as­so­ci­ated with them. In or­der to get the max­i­mum ben­e­fit from this prod­uct, in­vestors will have to be in­vested for the long term (at least 10 years).

Choos­ing the right prod­uct

We were also cau­tious not to sim­ply of­fer th­ese ini­tial prod­ucts to our clients. In­vestors have un­til Fe­bru­ary 2016 to de­cide what prod­uct to choose in or­der to use this year’s con­tri­bu­tion al­lowance.

Our main con­cern was that an in­cor­rect choice of prod­uct could re­sult in in­vestors chang­ing prod­ucts, thereby los­ing out in terms of their life­time con­tri­bu­tion limit.

For ex­am­ple, if an in­vestor in­vested R10 000 into a bank TFSA prod­uct, and sub­se­quently moved those funds to a more suit­able growth-ori­en­tated prod­uct, it would be counted as a R20 000 con­tri­bu­tion for the cur­rent tax year. An ideal TFSA is one that is well priced and of­fers clients ac­cess to a wide range of funds, which al­lows them to im­ple­ment a suit­able strat­egy over time. We were pleased when Stan­lib an­nounced the launch of its linked in­vest­ment TFSA prod­uct. The prod­uct is costed at an ad­min fee of 0.2% per an­num plus VAT. The prod­uct also al­lows the in­vestor ac­cess to a wide range of funds from top as­set man­agers, in­clud­ing Corona­tion, Fo­ord, Pru­den­tial, Sa­trix and In­vestec in ad­di­tion to Stan­lib’s own range of funds.

Big­ger op­tion

An im­por­tant fea­ture of the Stan­lib prod­uct is that it al­lows in­vestors to com­bine ac­tive and pas­sive in­vest­ments in their port­fo­lio to help mit­i­gate as­set man­age­ment fees. One could com­bine an ac­tive man­ager like Pru­den­tial with a pas­sive man­ager like Sa­trix and get a mod­er­ate risk port­fo­lio at a to­tal cost of less than 0.4% per an­num. Many of the ex­ist­ing prod­uct of­fer­ings force in­vestors to choose be­tween ac­tive and pas­sive man­age­ment, which is not ideal.

Un­like many oth­ers, the Stan­lib prod­uct does not of­fer pref­er­en­tial pric­ing for the use of in­ter­nal funds. This is an im­por­tant fea­ture as the prod­uct is not com­pli­cated by dif­fer­en­ti­ated pric­ing strate­gies. In­vestors are then able to hold their man­ager ac­count­able with­out wor­ry­ing about cost im­pli­ca­tions. There is also a broad enough range of funds avail­able for in­vestors with dif­fer­ing risk pro­files. So a very con­ser­va­tive in­vestor would be able to ac­cess cash as well as en­hanced cash funds, which have de­liv­ered bet­ter than cash re­turns with min­i­mal ad­di­tional risk. High-risk in­vestors, on the other hand, can ac­cess off­shore in­dex track­ers in ad­di­tion to other as­set classes such as eq­ui­ties and listed prop­erty.

In or­der to get the max­i­mum ben­e­fit from this prod­uct, in­vestors will have to be in­vested for the long term (at least 10 years).

Broadly ac­ces­si­ble

Stan­lib’s prod­uct is also more broadly ac­ces­si­ble as the min­i­mum monthly in­vest­ment is R500 and the min­i­mum lump sum is R10 000. Given that the group of peo­ple who will ben­e­fit the most from TFSA in­vest­ments is in­vestors be­low the age of 30, the lower min­i­mum is a sig­nif­i­cant pos­i­tive for the Stan­lib prod­uct.

In the fi­nal anal­y­sis, the Stan­lib-linked in­vest­ments tax-free sav­ings plan ticks all the right boxes from the per­spec­tive of a long-term in­vestor who is se­ri­ous about tak­ing ad­van­tage of the con­sid­er­able ben­e­fits TFSAs of­fer. The mar­ket is wait­ing to see what industry go­ril­las Al­lan Gray and Corona­tion bring to the mar­ket, if and when they launch a TFSA, but the bar has been set very high.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.