According to the National Stokvel Association of South Africa, stokvels across the country account for an estimated R50 billion in annual collections, with roughly 810,000 active groups consisting of more than 11 million contributors. Typically, stokvels meet on a monthly, fortnightly or weekly basis. Communities of people, be it a circle of friends or family members set joint savings goals and each contribute a set amount towards the goal.
These goals can include contribution towards member burials or savings that are withdrawn at the end of each year while, of equal importance, they exist for social interaction. Each stokvel is governed by a set of rules that are decided upon by the members, these rules ensure governance and compliance so that no member is ‘cheated’.
A major benefit of stokvels is that they harness collective saving power. A greater number of participants channelling their funds through a single source or vehicle potentially gives members the scope and speed to realise greater returns than if they had been funding their savings alone.
Young professionals who are part of stokvels are rethinking their model and value proposition to members, where some are now becoming investment vehicles that acquire and fund businesses. While these clubs won’t replace traditional saving, they enable people to pool their funds in creative ways that allow their money to grow.
Tax-free savings accounts
TFSAs were introduced to South Africa in 2015 to encourage household saving. Contributors are allowed to make deposits of up to R36,000 per year (up to a lifetime maximum contribution of R500,000) for a potentially significant lifetime of tax-free earning on investments.
TFSAs were originally the exclusive domain of banks but are now offered by a variety of financial institutions, such as 10X Investments, which invests the funds in the company’s suite of high-performing, low-cost unit trusts.
Investors in TFSAs don’t pay any tax on income, dividends or capital gains on their investments held in these accounts. This means that contributors can leverage the full potential of compound interest on their assets without the drawback of tax.
Eligibility for a tax-free savings account extends to all South Africans, even those without a tax number (an ID number is required). Parents and guardians can, therefore, open TFSAs on behalf of their children, meaning many more years of tax-free compound growth over their lifetime (as long as they can resist the temptation to withdraw their funds).
Savings vehicles for you
Stokvels are limited only according to the agreement of the members and have the benefit of connecting members of a community as they work towards a joint goal. TFSAs come with a contribution maximum and little-to-no social benefit, but the tax benefit over a lifetime of saving can be really significant.
TFSA’s encourage long-term saving and investing for individuals, while stokvels range across the spectrum, from short to long-term goals, and are designed for groups. The choice around capital allocation to either, or both, will depend on an individual’s personal situation and savings goals.
But it does not have to be a case of choosing one or the other, South Africans can harness the power of both to boost their individual and community savings ambitions. Either way, the existence and widespread uptake of these two types of savings vehicles in South Africa surely belies the idea that we are just not a country of savers.
Asavela Gwele recently took part in 10X’s Women’s Month webinar where, among other topics, she compared and contrasted Stokvels with Tax-free savings. You can watch the recorded conversation here.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
