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TAX-FREE SAVINGS ACCOUNTS OR RETIREMENT ANNUITIES: KNOW THE SAVINGS PRODUCTS AVAILABLE TO YOU

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By Michael Kirkpatrick, head of individual consulting best practice, Alexander Forbes

 

The start of a year is a great time to re-assess where we are in our journey to financial well-being and turn our attention to creating a financial plan for the rest of the year.

One of the most important aspects of this planning is considering the best combination of products in the market for your personal circumstances and needs. This includes tax efficiency, availability of investment funds, value for money, cost structures and access to the funds if you require them.

In South Africa we have access to several longer-term savings products that all have their own unique features that could provide some benefit to you. Two such savings products are retirement annuities and tax-free savings accounts, and here is how they can offer value to you when it comes to your savings:

 

Retirement annuities

A retirement annuity is an investment product that you can make once off and monthly contributions to in order to bolster your retirement savings.  RAs offer tax efficiency for both income tax and tax on investment returns. An RA works similar to a company pension fund – but without the employer. The benefits you get are:

  • Income tax: Contributions to retirement annuities are tax deductible, up to a limit of 27.5% of your income capped at R350 000 a year. This limit includes all contributions made across all your company retirement funds and retirement annuities. This benefit becomes more important the higher your current and future expected tax rates are.
  • Tax-free returns: Any return earned within the retirement annuity is tax free. Over the longer term this will have a significant benefit to your savings.
  • Access only after 55: For many people having a nest egg squirreled away that they can’t access is of great value to them. They know that if they could access the funds, they may be tempted to use the funds for more in the moment expenses sacrificing the long-term goal.

Michael Kirkpatrick

When you retire from your retirement annuity, you can take up to a third in cash. (This is after tax: the first R500 000 lifetime allowance is tax free and the rest is taxed on a sliding scale.) You must use the remaining money in the retirement annuity to provide you with a pension (income for life). This pension or income will then attract income tax.

 

Tax-free savings accounts

Tax-free savings accounts have grown in popularity since they were introduced in 2015. The government has provided a strong incentive within this product: tax-free returns. Over the long term this will have a significant benefit on your savings.

There are limits to the amount you can contribute to a tax-free savings account every year and over your lifetime. These limits are at a reasonable level and would cover many people’s needs.

To get the most out of this product, you need to be invested for the longer term so that you can benefit from the intended longer-term growth of the investment.

 

Get professional financial advice

There is no one-size-fits-all solution or combination of products. Every person is different and to have the most effective planning, individuals need to be treated that way.

We all have goals in life, and the first step to reach these goals is to have a plan in place. The more you stick to your plan, the closer you’ll get to your goal. Research shows that people who seek financial advice hold higher quality products with better outcomes. These people also have a higher savings rate and longer savings periods – all positive behaviour aimed at securing their financial well-being.

 

It’s never too early to start creating the future you want to have

It’s not easy thinking about the future, especially in these incredibly difficult times, and one can easily feel overwhelmed. It’s so important when making these types of decisions to approach a professional financial adviser for advice. They can review your individual circumstances, current savings and your long-term and retirement goals. Critically, this should be done as a family, so don’t forget to bring your spouse or partner into the planning – you must have a common goal. And together you can co-create the right plan for your family to reach those goals.

 

Finance

WHY THE EXPLOSION IN LOCAL RETAIL DEMANDS NEW PAYMENT METHODS

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Kasper Enggaard Krog, CEO at mobile payment and business technology firm, Vibrant, explains why micro businesses are being badly let down by contactless payment providers while local retail has boomed.

 

Before the pandemic, between 40[i] and 47[ii] per cent of micro businesses didn’t accept card payments, depending which statistics you prefer. This includes everything from corner shops to cafes and builders to barbers. They relied on cash, cheque, or where suitable, perhaps the laborious process of an invoice and bank transfer.

This is despite there being 6 billion contactless cards in the world and 47 per cent of people preferring to pay with one when at a physical point of sale[iii]. At first glance, it might seem that these small traders were cutting their noses off to spite their faces. Customers wanted to pay them with cards, why wouldn’t they just allow them to do so?

 

What was stopping merchants?

The answer is simple. Because for the smallest of merchants, accepting a card payment has always led to expensive ongoing fees, results in slow settlements, requires admin and calls for an up-front investment in cumbersome and basic technology.

It won’t be news to anyone in the industry that the recurring costs all add up. Transaction fees are typically between 1 per cent and 3 per cent, not to mention authorisation fees and merchant service charges[iv]. A credit card reader might be about £20 and the same for a receipt printer. This all eats into profit, not to mention time.

 

Kasper Enggaard Krog

The pandemic changed it all

Yet the pandemic has forced micro businesses to reassess their reticence to take card payments. Two reasons are behind this. Firstly, there has been an explosion in people shopping where they live. When lockdowns swept across Europe, it became hard to get to larger retailers. Local merchants of all sorts became a lifeline[v].

Not only that, but many people were forced to reconnect to their communities and realised they enjoyed shopping on their street and wanted to support independent businesses. The data proves this. According to research, the convenience store sector grew by 6 per cent in 2020[vi].

This led to the second factor, contactless payments were considered safer than handling cards or cash. The overall impact of more shoppers and the threat of infection led to a boom in contactless payments. In fact, the number of purchases made in May 2021 via contactless technology doubled compared with the same month a year earlier and was up 50 per cent on May 2019[vii].

 

Woefully underserved

This shift to accepting card payments among the smallest of businesses should be applauded. There are currently £2.25 trillion in cash and cheque payments made in Europe[viii]. They’re now opening themselves up to this huge market.

This is undoubtedly good for consumers and merchants alike. But it does beg the question, why did it take a pandemic to cause the change? Why did they have to face the prospect of potential infection or financial ruin to make the move?

Simple, the existing model is broken. The barriers to accepting card payments remain – high cost, poor tech and slow settlements – but they’ve been overcome through necessity rather than benefit. These businesses remain woefully underserved yet have been forced to accept what is on offer. There must be another way.

And there is. For the first time, the technology now exists for market traders, stall holders, car washes – any number of micro businesses – to take contactless payments using only their phone. No additional tech. No annoying dongles or readers that take up space and will ultimately add to the vast rubbish bin of obsolete, single-function peripheries. These will soon join calculators, MP3 players and digital cameras.

Furthermore, this tech not only takes payments, but within months is expected to allow merchants to run their whole business on their phone. They will be able to add product lists, inventory details, accounting tools and much more. It’s like a mini enterprise resource management system for the tiniest of firms. And the fees are transparent, predictable, lower than the market rate and don’t have binding contracts. Importantly, it also has the backing of Visa – and Vibrant is leading the roll-out.

The business is proud to do so and sees a huge opportunity. Micro businesses are now worth £1.85 trillion to the European economy[ix]. Their importance will grow, and they need the payments sector to take note of their needs and do better. It’s no longer acceptable to foist poor products and services upon them and allow the pandemic to drive change rather than innovation.

The explosion in local retail demands new payment methods – and they must be made available. In many ways, it’s a scandal that it took a pandemic to force change.

 

[i] 40% of the UK’s micro businesses do not accept card payments
[ii] Visa data
[iii] 40% of the UK’s micro businesses do not accept card payments
[iv] Credit card processing fees
[v] Local heroes: The retailers benefiting from the rise of localism
[vi] Lumina Intelligence UK Grocery Data Index for 2020
[vii] Contactless payments dominated as lockdowns eased
[viii] Visa data
[ix] Visa data

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Business

IS SCARCITY OF TALENT THREATENING THE UK’S FINTECH CROWN?

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Opinion From Rafa Plantier, Head of UK and Ireland at Tink

 

From the Square Mile to Canary Wharf, London has been the historic centre of global finance, with long-established trading exchanges and trusted financial institutions. In the digital era, it has also ensured that it’s moved with the times to become a thriving hub for fintech.

But the UK financial services sector is now at an inflection point. In the past year, London’s position as a global fintech leader has been under threat. Earlier this year, Amsterdam overtook The City as the largest European share trading hub. The European Banking Authority moved from London to Paris. And Dublin, Paris and Frankfurt are all competing to win a greater share of the European financial marketplace.

The culprits of the shift are the twin challenges of the pandemic and Brexit, combined with the speed of technological transformation in financial services – disrupting the traditional flow of people, capital and ideas. So the pressing question for the industry is: how do we maintain and, more importantly, accelerate momentum to retain London’s fintech crown?

The answer revolves around one key thing — people.

 

Diverse talent drives innovation

Attracting the best talent is crucial if the UK financial services sector is going to continue to thrive and retain its global position as the preeminent financial centre.

In February 2021, the Kalifa Review laid out a strategy and delivery model for the UK to lead the fintech revolution, covering five key areas. These included skills and talent, investment and international attractiveness and competitiveness. But what became clear was that access to the right level of highly skilled talent was one of the biggest challenges for UK fintech, with barriers spanning both domestic skills shortages and the need to access foreign talent seamlessly.

As a native Brazilian in the UK, working for a Swedish-owned fintech, I understand these challenges as well as anyone. I love London, but we must recognise that fintech firms need unique talent and skills, and such a talent base can’t be met by a single city – not even one as resourceful as London. Not only do fintechs require technology and data specialists, but also experienced managers with good knowledge of high-growth companies and financial services.

As someone lucky enough to have worked with startup and scale-up fintechs across the world,  I understand the unique grounding that comes from being a part of a high-growth global company. That’s why I believe it’s vital that we attract people from across the world with commercial experience at ambitious, rapid-growth businesses — so they can bring this experience to bear on the UK financial services sector.

At the same time, many companies face renewed pressure to create new services and products to meet expectations for growth. That is why it’s critical that the UK has access to people with the right technical skills in areas such as software engineering, DevOps, Cybersecurity and data science.

Put simply, having the smartest minds delivering the best products is good for everyone. It drives efficiency, productivity,  growth and, ultimately, prosperity.

 

The UK is open for fintech

The UK should be proud of being a fintech pioneer and the driving force behind legislation that helped usher in the era of open banking. There is now an exciting opportunity to take this even further. Having access to a diverse pool of talent and skills will empower the financial services industry to create innovative products to tackle complex social challenges, such as better B2B payments, financial inclusion and climate change.

The good news is that the UK government clearly recognises the role the industry has to play in driving growth and innovation. The 2021 Autumn Budget reaffirmed commitments to reskill the nation. With £3.8bn budgeted for skills and a formal criteria for the long-awaited Scale Up Visa, the Chancellor announced a set of proposals that will support the breadth of our sector — from startups right through to unicorns and incumbent banks. This will be essential for fintechs like ours to continue to trailblaze and for the UK to differentiate itself on the global stage.

In an increasingly competitive global landscape, and to sustain momentum, we must keep talent avenues open to attract the best of the best in the industry. As one of the fastest-growing areas of the UK economy, the benefits of nurturing UK fintech to drive productivity, growth and lead the UK’s post-pandemic recovery, cannot be overstated. 2021 has seen a surge of activity in the industry and I am eager to see what London’s fintech sector can achieve in 2022.

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