Investments housed within the proposed tax-incentivised savings accounts will have to be good for your financial health – the financial services industry will not be allowed to offer complex, difficult-to-understand products or those that hit you with high penalties if you stop or reduce your contributions, National Treasury says.
Treasury says it plans to allow financial services companies to provide only certain types of investments within the savings accounts, and its list of approved products will act as a recommendation or guide for you, a revised policy document on these accounts released yesterday reveals.
Treasury does not regard all savings products as worthy of being accorded tax incentives to persuade you to save in them – some do not meet its requirements for simplicity, transparency and suitability.
The accounts, which were first proposed in the Budget in 2012, will allow you to save after-tax money free of any dividends tax, tax on interest and capital gains tax.
You will be able to contribute up to R30 000 a year and R500 000 over your lifetime. The growth on the contributions can exceed these amounts.
Treasury aims to introduce the savings accounts from March 1, 2015, and amendments to the Income Tax Act to enable financial services companies to provide the accounts will be tabled this year, the document says.
According to Treasury’s revised policy document, you will be able to open one or two tax-incentivised savings accounts a year.
Bank savings accounts and fixed deposits, unit trust funds, exchange traded funds (ETFs) that are registered as collective investment schemes, retail savings bonds and real estate investment trusts will be approved as underlying investments for the savings accounts.
Life assurers may offer investments within the saving accounts only if they don’t require you to make regular contributions or have excessively high penalties if you stop or reduce your contributions.
The revised policy document released this week says “government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable”.
Treasury says it will engage with the Financial Services Board (FSB) and the financial services industry to determine what is a reasonable penalty if you disinvest before the maturity date.
You must be able to transfer your investments between savings accounts held at different financial services companies free of “unreasonable” termination charges and without the transfers affecting your annual or lifetime contribution limits.
Treasury’s revised policy document says you must be able to transfer collective investments without incurring penalties, but banks and life assurers will be able to charge a “reasonable” penalty if you transfer out of a fixed deposit or a savings policy before the end of the term.
It is unlikely that life assurers will be allowed to offer structured products within the savings accounts. Products that include death, disability and other risk benefits will be excluded, Treasury says.
Stockbrokers registered with the FSB will be able to offer you a tax-incentivised account exclusively for ETFs, but they will not be allowed to offer you accounts in which you can trade individual shares, the revised policy document says.
Exchange traded notes and ETFs that are not registered as collective investment schemes, such as the gold ETFs, will not be recommended for inclusion, Treasury says.
The products offered through the tax-incentivised accounts must be simple to understand when it comes to identifying the underlying assets in which the products invest and the returns the products are likely to earn, Treasury says.
It says there will be “little need” to include complicated products that offer returns that depend on certain conditions being met or products that include derivatives used for purposes other than hedging the performance of investments in a collective investment, such as a unit trust fund.
Treasury says the costs of the pro-ducts housed within the tax-incentivised savings accounts must be disclosed clearly. These disclosures must include the fees incurred at each level of service.
Cost disclosures and product information will have to conform to the requirements for Key Information Documents, which the FSB and National Treasury are developing under the Treating Customers Fairly principles. Disclosure and information will also have to conform to the proposals on how charges may be applied to all investments. These proposals will soon be released by the FSB in what is known as the Retail Distribution Review.
National Treasury originally proposed that equity investments and interest-earning investments should be housed in separate accounts, but it has scrapped this proposal based on feedback from the financial services industry.
In its revised policy document, Treasury responds to comments on its initial proposals that, if you did not contribute the full R30 000 in a year, you should be allowed to roll over the balance to the following year. National Treasury says that if this were allowed, it is likely to encourage people to delay saving.
It also responds to criticism of its proposal not to allow you to replace contributions you have made that you subsequently withdraw from a tax-incentivised account.
It says it wants to encourage you to “think twice” about withdrawing your savings and to exercise self-control over your savings.
It acknowledges that you may have to withdraw the money in an emergency, but it says it would be difficult to provide a special dispensation to accommodate such withdrawals.
The revised policy document also addresses the issue of your contributing more than the annual or lifetime limits to different accounts held at different financial institutions. In this case, Treasury proposes that the South African Revenue Service will tax – at your marginal tax rate and without applying the tax exemptions on interest earnings – the interest, dividends and capital gains you earn on contributions that exceed the annual or lifetime limits.
The revised policy document does not announce a change to the plan to allow inflation to erode the tax exemptions for interest earned on savings.
Currently, if you are below the age of 65, you can earn up to R23 800 a year in interest without paying tax on it. If you are over the age of 65, you can earn interest of up to R34 500 tax-free. These amounts will not be increased in future.
Treasury’s document is available on its website (www.treasury.gov.za), and comments can be submitted until April 30.