Scrutinise new Absa 13% offer

INTEREST: ON CAPITAL, NOT COMPOUND

Bank says customers are ‘generally reasonable enough to detect any attempt to mislead them’.

Absa offers 13% per annum on five-year fixed deposits of R100 001 plus. In the current low-return environment, that seems astonishingly attractive. Until one reads the fine print. This isn’t compound interest. Absa’s stating the return in simple terms: 13% is earned purely on the initial capital amount.

For a R150 000 investment, you’d effectively earn R19 500 per year each year. At the end of five years, you’d have R97 500.

You only see that full amount if you don’t take any interest during the life of the product and only receive it as a lump sum at the end.

What you’re really earning

Objectively, this is still an excellent return, well ahead of large competitors. It represents a 10.05% guaranteed compound interest rate.

But why wouldn’t Absa state it in those terms in advertising, as it does on its website?

“For advertising purposes … we deliberately chose 13% to provide maximum benefits to customers who are able to be resilient to afford a 60-month investment period,” says Absa’s Cowyk Fox.

Customers could still take the monthly interest. This would be paid at 10.05% – the real rate being earned.

A 13% return from a big bank is good enough for many people to move their money without scrutinising the fine print or receiving advice.

“In the current economic environment, where pensioners are battling and … are frightened by the noise about market risk, 13% is such a drawcard,” notes independent financial advisor John Bustin, saying many will end up locked into an inappropriate investment.

Potential risks

Bustin says that first of the potentially unseen risks is SA is entering a rising interest rate cycle. Will a 10.05% locked-in rate still be attractive if the Reserve Bank (Sarb) lifts rates by 2.5%? Absa says that actually Sarb’s last change was to lower interest rates. It also encourages potential customers to get advice.

Bustin’s second concern is for anyone moving money out of another investment for this offer to consider capital gains tax. In addition, if anyone wants to take advantage of the full “13%” offer, they’ll receive a lump sum payment after five years. As this is interest, it’ll be considered income and taxed. This could result in people finding themselves in a higher tax bracket and the return being substantially eroded.

Finally, what if an investor needs to access their money before the period’s over? In exceptional circumstances, at Absa’s discretion, it’ll allow you to end the investment early. This incurs a fee, which it’ll only reveal if/when the time comes.

Is it misleading?

“In reality, 10.05% is an excellent fixed deposit rate,” says Bustin. “But expressed as 13%, without disclosing that it is simple interest is misleading no matter how you skirt around it.”

Absa says if the campaign was misleading, the authorities would have spoken up.