Feb 2, 2021
While tax-free savings accounts (TFSAs) allow withdrawals at any time without penalties, it is important to view them as long-term savings vehicles and therefore choose their asset allocation appropriately, says Jaco van Tonder, Advisor Services Director at Ninety One.
In his view investors should not look at TFSAs as a substitute for their six-month emergency cash flow fund. “An individual’s lifetime tax-free savings allowance can never be recovered once used. Therefore, if people save in a TFSA and then spend some of that money, it cannot be replaced and that allowance is lost forever. It counts towards your life-time cap and there is no top-up option”.
He says most financial advisors recognise the same and they are advising their clients to retain their existing emergency fund arrangements.
He says due to the life-time cap people typically start seeing the returns matching or even exceeding their contributions only after about 10 years, and after 20 years the value of the tax saving becomes substantial relative to the size of the original contributions.
Given this long-term nature of the TFSA, Van Tonder says it is encouraging that investors are recognising that they can structure the portfolio for more growth. TFSAs are also not restricted – as is the case with pension funds and retirement annuities – in terms of the asset classes in which the money can be invested.
“The trends we are seeing on the Ninety One Investment Platform to date [which offers investors access to a wide range of underlying unit trusts], is encouraging. A tiny amount of money has gone into the money market (1% according to Ninety One’s experience), while more than 90% of the TFSA assets on our platform are invested in offshore, equity or multi-asset (balanced or flexible) funds.
“It is heartening that investors are prudently investing for long-term growth, choosing funds with a high allocation to equities, including good offshore exposure,” he added. The most supported fund by some margin on the platform is the Ninety One Global Franchise Feeder Fund, reflecting investors’ appetite for increased offshore diversification.
For investors who are unsure which fund to pick for their tax-free savings account, Van Tonder suggests that they take a close look at the popular multi-asset funds. These funds provide a good blend of domestic and offshore exposure across asset various asset classes.