Have you ever thought to yourself: “Why isn’t there a product for such-and-such?” A problem with our financial institutions is that all too often the customer is expected to fit the product instead of the product being designed to fit the customer. While products have proliferated over the past two decades, the wider choice has not made life easier for the consumer; it has just made things more befuddling.
I have often wondered why more players in the financial services industry don’t take the consumer into consideration and design simple products that serve a simple purpose and offer good value.
Here is my wishlist of a handful of simple financial products with the consumer in mind.
Bank recurring-deposit savings bond
If you want to put away, say, R1 000 a month into a low-risk savings vehicle with the intention of letting your savings build up over three to five years, what are your options?
The most flexible option is a unit trust investment with an asset manager. In a low-risk money market or interest-bearing fund, you’ll probably earn 8% or 9% a year at current rates. (Don’t forget, anything below 6% does not beat inflation, at 5.9%.) The minimum lump-sum investment may be R10 000 or more, but many funds will accept a monthly R1 000 debit order.
What do the banks offer for recurring deposits? It turns out nothing much at a competitive interest rate. You get fairly decent interest on fixed-term lump-sum deposits, but on the more flexible savings and transaction accounts the rates are pitifully low and don’t beat inflation.
The best you can do at a bank, as far as I can see, is a notice account, but to get a decent interest rate your balance may need to be high. The best rate at the moment on a low balance (R1 000), according to the RateCompare website, is Discovery Bank’s 8.45% on its 32-day notice account.
Capitec offers a fixed-term account into which you can make multiple deposits, but the interest rate beats inflation only at balances of over R10 000.
National Treasury recently introduced the Top-Up Bond to its range of RSA Retail Savings Bonds, which allows you to make multiple deposits over the three-year term of the bond. The current interest rate on this product is a terrific 10% and the minimum balance is R1 000. This is a great option if you don’t mind your money being tied up for three years. (You can access your money after 12 months, subject to an interest penalty.)
So why can’t the banks offer something similar? My suggestion: a three-year savings bond which you can top up at any time or to which you can contribute via a monthly debit order from your current account. At a competitive rate of interest, please.
Medical aid with no need for gap cover
It has always amazed me that you need to take out gap-cover insurance on medical scheme plans, which are themselves a form of insurance. This is to cover the difference between actual in-hospital specialist fees and the portion of those fees covered on your plan, according to the medical scheme’s determined rates.
Typically, a medical scheme plan will cover an in-hospital specialist’s bill at 100%, 200% or 300% of its set rate, depending on your plan. Specialists regularly charge way over this, because it seems there is no limit to what they can charge. So gap cover was designed to bridge this cost gap.
For gap cover, you’re looking at probably about R600 a month for a family. So why can’t this cover simply be incorporated into your existing medical scheme cover for a similar amount?
The two types of cover are governed by different laws: medical scheme cover falls under the Medical Schemes Act and gap cover under the Insurance Act.
However, this should not prevent medical schemes charging an extra R600 a month per family to cover in-hospital specialist costs in full.
The reason they don’t do this, I believe, is that their set rates for medical treatments and procedures would then become meaningless and they would be at the mercy of the medical profession to pay whatever they charge.
The absurd result? Discovery (for example) offers gap cover to cover the shortfalls in its own medical scheme cover.
My suggestion: the medical fraternity comes to the table and caps rates, and then medical schemes, for a little extra, cover those rates in full.
RSA Retail Annuities
National Treasury’s RSA Retail Savings Bonds are terrific, simple-to-use investment products that offer competitive returns at next to no risk. The fixed-rate bonds are paying 10.75% annual interest on a five-year investment and the 10-year inflation-linked bonds are paying an income of 5.25% on capital that increases by the inflation rate. As mentioned above, Treasury recently added the Top-Up Bond to the product range.
The private sector cannot seem to match these products.
My suggestion to Treasury: expand your range to include tax-incentivised pre-retirement and post-retirement annuity investments. Granted, the legislation governing retirement funds and pensions would have to be amended. But hey, you’re the government - that shouldn’t be too difficult.
As I envisage it, one could contribute to an RSA Retail Retirement Annuity at rates comparable to the savings bonds, with contributions being tax-deductible. Then, at retirement, you could transfer into an RSA Retail Living Annuity and enjoy an inflation-linked pension income. As with a private-sector living annuity, the income would be taxable in your hands, but the returns or gains on the capital would be tax-free. There may be a few things to iron out from an actuarial standpoint, but not anything beyond the capabilities of the retirement industry’s bright young actuaries.
* Hesse is the PF former editor.
PERSONAL FINANCE