Tax-free savings FAQs

Feb 2, 2020

5 minutes


Give me the basics. What is a TFSA?

Tax-free savings accounts (TFSAs) were introduced in 2015 to encourage individuals resident in SA to save more. Through a TFSA, the growth and income received on the investment is tax free, which means you are not liable for any capital gains tax or income tax on the dividends and interest received on your investment.

How much can I invest in a TFSA?

There are limits to how much you can contribute. Currently, the maximum amount you can contribute to a TFSA is R36 000 per year (or R3 000 per month via debit order) and the maximum lifetime contribution is R500 000. Don’t be daunted by this amount, however. You can start your TFSA investment with Ninety One Investment Platform from as little as R500 a month.

Can I withdraw from a TFSA?

You can withdraw money from your TFSA at any time without penalties, but once you’ve reached your lifetime maximum allowance, you can’t top up again after a withdrawal. By dipping into your TFSA over the short term, you are not only not getting the tax benefit that accumulates with time, but you’re also losing out on the potential long-term returns.

What investment horizon should I have for my TFSA? Can I use it as a short-term emergency cash pool?

TFSAs should be used as long-term investment vehicles – either as a welcome boost to your own retirement pot or for, example, to provide your kids with a wonderful start in adult life – such as a university education or a deposit on their flat. Why long term? Because that is the way to maximise the value of the tax incentive. Since the growth and income received on the investment is tax-free, you only realise a tax benefit once there has been substantial investment growth on the portfolio. You would normally see the returns of a TFSA matching or even exceeding your contributions only after about ten years. After 20 years, the value of the tax saving becomes substantial relative to the size of the original contribution.

Furthermore, remember that the maximum lifetime contribution to a TFSA is R500 000. Once you’ve reached your lifetime maximum allowance, you can’t top up again after a withdrawal. By dipping into your TFSA over the short term, you are forfeiting the tax benefit that accumulates with time; you are wasting part of your lifetime contribution and you’re also losing out on the potential long-term returns.

Almost every financial services company offers a TFSA in some form or other? It can be confusing to pick one. Where do I start?

Keep it simple. There are a multitude of service providers and options to choose from, which may be confusing. There are several benefits to picking an investment platform. In addition to the fact that investment platforms offer an extensive choice of local and international funds covering all risk profiles, asset classes and sectors, investors also have the flexibility to switch between them. Furthermore, investors can easily see a consolidated view of their entire portfolio, which might include a retirement annuity and discretionary investments in addition to a TFSA.

How do I decide between the multitude of underlying funds offered by a platform?

Given our view that investors should invest in a TFSA for at least ten years to realise the tax benefit, we believe the portfolio's asset allocation should reflect a long-term view and have a higher allocation to growth assets (like equities both locally and offshore) rather than a large allocation to cash, which provides a much lower return over the long term.

It’s simpler to illustrate with an example: If you’re diligent, and set up a TFSA once your child is born, you’d be able to contribute R3 000 per month for just short of 14 years before you reach the current maximum allowed contribution. If you invest in a growth portfolio that generates investment returns 10% per year after all costs, the value of your investment at the end of that 16 years would be just over R1.2 million. Taking inflation into account, the equivalent value in today’s money terms would be around R500 000.

If you had instead invested these TFSA assets in a money market fund (or cash deposit), the portfolio would likely be worth only R330 000 or less in today’s money terms.

It seems that a good starting point for most TFSA investors is to have a look at South African unit trust funds from the “ASISA Domestic Multi-Asset: High Equity” or similar category. These funds have historically produced very attractive long-term risk-return trade-offs, and work even better when tax does not affect the structure of the investment decision.

One can comfortably move even higher up the risk curve, especially for longer investment horizons. The most commonly selected investment option on our investment platform has been the Global Franchise Feeder Fund.

Are TFSAs the only tax-efficient savings vehicles?

TFSAs are a fantastic additional incentive to encourage investors to save more, specifically for those with a long-term horizon, but the first savings priority for any investor should still be their contribution to a registered retirement fund (either through their employer or via a retirement annuity).

Secondly, investors sometimes forget that they have an annual tax-free interest exemption. At current money-market rates, you can keep close to R300 000 in a money market fund before paying any tax on the interest. Ideally, this allowance should be used to set up your emergency cash pool rather than a TFSA.

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Important information

This communication was originally published by Investec Asset Management (Pty) Ltd, the predecessor of Ninety One SA (Pty) Ltd. The information is accurate as at the original date of publication, but any views expressed may no longer be current. The communication has been republished in our new branding but has not otherwise been updated.

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Ninety One SA (Pty) Ltd is a member of the Association for Savings and Investment SA (ASISA). Ninety One SA (Pty) Ltd are authorised financial services providers.