It has been 10 years since the tax-free savings account (TFSA) was introduced in South Africa. It is aimed at South Africans in general as an investment vehicle suitable for most people’s savings goals in a bid to improve the country’s savings culture.
In a way, TFSAs replaced interest exemption on your personal income tax: interest exemption has not increased since tax-free savings were launched.
At the start, the maximum allowable contribution was R30 000 in a tax year.
A document issued by National Treasury on 14 March 2013, titled Non-retirement savings: Tax-free savings accounts, states the following in its introduction, referring to the budget speech of that year:
“Tax-preferred savings accounts, … will have an initial annual contribution limit of R30 000, to be increased regularly in line with inflation, …[with] a lifetime contribution limit of R500 000.” 2014 Budget Review
Investors were able to make contributions from 2015 (during the 2016 tax year of assessment), starting with a maximum of R30 000 for years one and two, increasing to R33 000 for the following three years, and then R36 000 from 1 March 2020. Since then, somebody has forgotten the part “to be increased regularly in line with inflation”.”
Source: Author supplied
Adjusted for inflation, the current maximum contribution could be about R47 000.
Shall we have any hopes for an increase this year?
The 10-year milestone does make us ask a few questions: Is a TFSA worth it? Who can benefit? For what purpose can it be used? What are the values of TFSAs that have fully utilised the contribution limits since inception?
Is it worth it?
Initially, the annual investment contribution limit seemed low and was certainly intended for long-term savings. In the short term, let’s say less than five years, there was not much to get excited about. But in the investment world, anything with a tax benefit must be considered The fact that there is no capital gains tax, dividend tax, or interest tax on investment growth is extremely valuable, especially for long-term investments.
Who will benefit? What can it be used for?
It is a simple and cost-effective savings vehicle that can benefit all investors. It can be used for many purposes, from education savings to supplementing retirement savings.
What is the value of a typical TFSA that made full use of the maximum contributions to date?
The cumulative value of the maximum contributions allowed up to 28 February 2025 is R339 000.
One of the leading linked investment service providers published that R833 000 is their highest-value account. Obviously, this is an outlier, and there will even be some TFSAs that did not perform well at all because of a non-performing fund as the underlying investment.
Let’s however consider a realistic value of a TFSA that produced net growth of 8.5% in a balanced fund over the last 10 years, while inflation over this period averaged 4.5%.
Source: Author supplied
The value of the TFSA will now be approximately R537 000. Projecting the same growth rate and that the maximum lifetime contribution of R500 000 is reached within five years, the value will reach R1 million and continue to grow tax-free.
Source: Author supplied
It seems to be a useful tool for supplementing income after retirement and helping people stay in lower income brackets. It is no wonder that more advisors are recommending TFSAs as part of a retirement plan.
Here are a few tips for investing in and managing a TFSA:
- Do not make withdrawals from a TFSA in the short term.
- Do not use a TFSA for short-term investment goals.
- Stick to a well-diversified fund/portfolio.
- Invest every year at the beginning of the tax year, if possible.
- If no lump sum is available, consider a debit order up to R3 000 per month.
- If you have never invested in a TFSA and have R72 000 available for investing, contribute R36 000 before 28 February 2025 and R36 000 again in March.
- If you use a TFSA to build up an emergency fund, you will nullify the benefits of this type of account if you access the funds straight away; it is effective if it is used to build up an emergency fund for 15 or 20 years.