This weekend the taxman's offer to enhance your savings expires. Anyone who wants to buy a retirement annuity (RA) in this financial year needs to buy one before the end of February. Since they were first marketed to the public in the 1960s by Donald Gordon, RAs have become a major product line for life assurers and unit trusts, which receive more than R25bn/year through this vehicle. RAs have been successful if you consider that they are held in 26% of all households and 53% of those with monthly income of more than R40 000.
Who can say that the money would have been saved without the tax concession? And if it had been funded out of post-tax income, the RA would have provided a much lower pension. One of the advantages of RAs is that they have the highly unpopular feature known as compulsory preservation. The funds in an RA cannot be taken out before 55. This is, quite illogically, not the case with pension and provident funds. As we all know, when we change jobs we are free to fritter away our accumulated capital: even if we do the rational thing and move our capital into a preservation fund, there is an exit clause that permits one withdrawal after six months.
For the average salary earner, the tax concession on RAs erodes every year. People who already belong to a pension fund can only deduct a modest R1 750, a figure that has remained unchanged for more than 30 years through National Party and ANC governments alike.
So-called tax breaks for the rich are electorally unpopular, but rich people have plenty of scope to enjoy tax deductions on their income, as 15% of variable pay such as investment income and bonuses still qualifies for a tax deduction, with no upper limit. It is the poor working stiff with none of these perks who has been squeezed.
There is a widespread belief, particularly in the department of social development, that tax breaks have not worked. And it is true that SA has an appalling household savings rate. According to the SA Savings Institute, the rate has improved over the past three years from a negative 0,8% to a (still) negative 0,4%. But the main explanation for the token improvement has been the introduction of the National Credit Act. However, this does not even qualify as the first brick in building a savings culture. As any marketing department in a bank will tell you, it is a lot more exciting and fun to launch a lending product, such as revolving credit, than it is to launch a savings product.
As all but 3m people in SA are not taxpayers, the tax break in an RA is irrelevant. So there needs to be creative ways to encourage saving. One that can work is to appeal to people's greed. Harold Macmillan introduced premium bonds in the UK back in 1956 and they remained, even after the introduction of the National Lottery, an extremely popular way to raise money. Perhaps a few prize draws should be built into RSA Retail Bonds. But a less frivolous approach has been the Fundisa Fund, in which for every R2 400 invested, a bonus R600 is added by the department of education that can be used for tertiary education.
However distasteful it might be for a free-market publication such as the FM to admit, some form of compulsory saving is inevitable. There is no denying the role of compulsory pension and provident fund arrangements in the recent economic success of Singapore, Malaysia and Chile and it is part of the potent brew in the phenomenon we call China.
The bad news is that when saving is compulsory it does not have to be tax deductible, and social development firebrands will do their best to make sure this "concession" is removed.
Compulsory saving does not have to mean a monolithic state institution and the dismantling of the existing private-sector fund administration industry. The private sector is understandably a big fan of the Chilean model, in which the entire pension industry is subcontracted to the public sector, with the state simply playing a governance role. But in SA compulsory savings will inevitably mean more state involvement.
Ranking the Analysts 2009
