Progress on tax free savings vehicles, but scathing words for life insurers

Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. 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. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.


Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. On the idea itself:
    great way to incentivise savings (I think). But do the current interest rate & capital gains tax exemptions not achieve the same goal … arguably with much less admin hassles. Introduce a few more expemptions (dividends) etc and we have replicated the tax free savings vehicle.
    Granted, probably not as marketable as “this is a tax-free savings vehicle”?

    Am I missing something?

  2. Treasury is obviously right to push for simplification and reduction in unfair penalties on savings products. However the impression I get is that they (Treasury) are ignoring the main driver of these vilified fees, namely the commuted advice fee structure which results in product providers having to come up with ever more inventive ways to recoup this large initial outlay. Given that ASISA stats illustrate a vast majority of industry flows come from brokers, no product provider will be suicidal enough to be the first to kill off this commission structure and risk alienating its broker force. Treasury shouldn’t forget the reality that people are generally bad at saving and see little value in financial advice which clearly shows in how over 90% of South Africans are not able to retire comfortably. Brokers are a highly effective tool in getting people to save more and even an inefficient system is better than a system with highly efficient products that people don’t use due to a lack of financial advice. i.e. I hope they don’t throw the baby out with the bathwater

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