TFSA

TFSAs – helping to maximise your retirement income and minimise your estate duty liability

Drawing additional income from a TFSA could mean more money in your pocket when you are retired. Besides paying no tax on the growth and income received from a TFSA investment, these savings vehicles offer potential retirement and estate-planning benefits.

23 Dec 2025

5 minutes

Paul Hutchinson

Tax-free savings accounts (TFSAs) are a great initiative from government to encourage savings in South Africa. Jaco van Tonder, Advisor Services Director at Ninety One, has shared his insights on how to maximise the value of the TFSA tax benefits.1 The tax advantages are well documented: you pay no tax on dividends and interest received, and no tax on capital growth.

As a result, you benefit from increased compounding of returns. Jaco’s article shows that after 20 years, TFSA investors realise an additional 20% return due to these tax benefits. However, far less has been written about the potential retirement and estate-planning tax benefits.

The first choices

Any member retiring from a provident, pension, provident preservation, pension preservation or retirement annuity fund needs to decide what portion of their retirement benefits they would like paid out as a cash lump sum. You may take a cash lump sum (subject to tax) of up to a maximum of:

  • the full value of the benefits in your Savings component,
  • any provident fund vested benefits, which are part of your Vested component (if applicable), as well as
  • one-third of the remaining benefits in your Vested component (ignoring any provident fund vested benefits).2

The remaining balance must be used to purchase an annuity, either a guaranteed or living annuity, which pays a monthly income that is taxable at the annuitant’s marginal tax rate.

How can a TFSA help reduce this potential income tax liability?

A TFSA can help a retiring member who has chosen a living annuity reduce their marginal tax rate and therefore maximise their after-tax income.

Having established the income required in retirement, retiring members next need to determine how to access this income in a tax-efficient manner. As indicated below, a minimum income rate of 2.5% per annum must be taken from the living annuity, taxable at the individual’s marginal tax rate. Any additional amount required above this 2.5% can then be withdrawn from the TFSA. These withdrawals are not taxable and therefore may help to minimise the retiring member’s marginal tax rate, as long as capital remains in the TFSA.

Drawing additional income from a TFSA means more money in your pocket for the same level of gross income drawn from the living annuity and TFSA combined.

A living annuity is a compulsory purchase annuity offered by insurers, retirement funds and linked investment service providers under which the income is not guaranteed but is dependent on the performance of the underlying investments. Importantly, living annuity regulations allow the annuitant to elect an income of between 2.5% and 17.5% per annum. However, research indicates that annuitants should not exceed an annual income rate of 5%, otherwise they risk ruin.


This is best illustrated by a simplified example. Assume an investor has accumulated R1.8 million (as suggested by Jaco’s article)1 in his TFSA over the preceding 20 years and R7.5 million in his pension fund, which he then converts entirely into a living annuity. He requires an annual income of R350 000 and his only source of income is his TFSA and living annuity.

Below are two simple scenarios based on the 2026 tax year’s income tax tables (ignoring the tax rebates and assuming no other taxable income):

1In year 1, the investor takes the full R350 000 from his living annuity (a drawdown rate in year 1 of 4.67%). He will pay income tax of R72 032 and receive an after-tax income of R277 968. His marginal tax rate will be 26%.

OR

2 In year 1, the investor takes the minimum 2.5% from his living annuity (R187 500) and the remainder from his TFSA (R162 500). He will only pay income tax of R33 750 and receive an after-tax income of R316 250, i.e. a tax saving of R38 282 in year 1 and which, depending on the changing tax tables, is likely to escalate each year for so long as there is value in the TFSA. His marginal tax rate will be 18%.

Maximise the compounding growth of your retirement capital

Not only does this strategy reduce your marginal tax rate but it also ensures that your living annuity capital continues to compound faster, as your capital is eroded more slowly than it would be were you drawing more than the minimum.

Importantly, as with TFSAs, no income or dividend withholding tax is levied in the living annuity, and capital gains tax is not applicable in terms of current legislation – only income paid by the living annuity attracts tax. As is the case for TFSAs, retirement capital invested in living annuities therefore benefits from increased compounding returns.

Minimise any estate duty liability

Estate duty is an important consideration for investors. Like other discretionary investments, TFSAs are subject to estate duty. Therefore, on death, it would be preferable to have depleted your TFSA, while maximising the capital growth of your living annuity.

You may nominate a beneficiary or beneficiaries to receive your living annuity benefits on death, which could in turn confer tax benefits on them. Beneficiaries may choose to receive the benefits as an annuity, a lump sum (subject to tax) or a combination of the two. Irrespective of whether the benefits are received as a lump sum or an annuity, the benefits are free from estate duty. Bear in mind that disallowed contributions (retirement fund contributions in excess of a maximum allowable deduction) may be subject to estate duty where such contributions were made after 1 March 2016 and the benefit is received as a lump sum.

We encourage financial advisors and investors to carefully consider all the financial, retirement and estate-planning benefits that TFSAs provide, including when used in combination with living annuities. By investing in a TFSA with Ninety One Investment Platform (Ninety One IP), investors benefit from a competitive fee structure, transparent pricing and a wide range of funds from Ninety One.

Download the PDF

1 Making the most of your TFSA
2 For more information on the two-pot system and how it impacts your retirement fund benefits, visit our two-pot hub.

Paul Hutchinson
Sales Manager

Paul is a sales manager within Ninety One’s South African advisor team. His focus is on...

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