The burden on South African taxpayers is getting heavier. The top income tax bracket has been increased to 45%, and the introduction of a “wealth tax” is being debated. Using tax-efficient investment vehicles is essential if you want to preserve or generate your wealth. 

You are taxed on the growth earned by your investments – the interest earned in a bank account and the dividends received from shares or unit trust funds. If you sell an investment that has made a profit, you could be liable for capital gains tax (CGT).

There are some exceptions:

• You are not taxed on the growth earned by investments housed within a retirement-savings vehicle such as a retirement annuity (RA) fund and a pension or provident fund;

• The first R23 800 of annual interest income is not taxed if you are under the age of 65 (R34 500 if you are over 65); and

• Investments housed in a tax-free savings account (TFSA).

National Treasury introduced TFSAs on March 1, 2015. These types of accounts have been available in other parts of the world for some time. The United Kingdom launched the tax-exempt special savings account in 1990. It was replaced by the individual savings account in 1999. Canada rolled out a TFSA in 2009.

The basic features of South African TFSAs are:

• You do not pay any income tax, dividends tax or CGT on the returns earned by your investments.

• The maximum contribution is R33 000 per tax year, or R2 750 a month. (The limit was increased from R30 000 to R33 000 on March 1 this year.)

• There is a lifetime contribution limit of R500 000 per person.

 • If you exceed the contribution limits, you will be liable for tax of 40% on the excess amount.

• If you do not contribute the maximum amount in a tax year, you cannot carry the shortfall forward to top up your contribution in the following next tax year.

 • Only individuals can use a TFSA; a trust or business cannot open this account.

• An account can be opened in the name of a minor as long as he or she has a tax number.

• You can withdraw your money at any time without paying a penalty, but any withdrawals are not taken into account when your annual or lifetime contribution limit is calculated.

Given the restriction on how much you can contribute, it could be argued that the case for TFSAs is limited. After all, R500 000 over your lifetime is not a massive amount in the grand scheme of things.

So why not invest all your funds in an RA, which does not have contribution limits, and where your investment growth is also tax-exempt? Furthermore, your contributions to an RA are tax-deductible, although the deduction is capped at R350 000 per tax year. 

These are valid points, but you can access an RA only when you are 55, and when you do, you will be back on the radar of the South African Revenue Service. If the value of your RA is more than R247 500, you are required by law to commute at least two-thirds of your fund value to either a life (or guaranteed) annuity or a living annuity, or a combination of the two. The annuity will pay you an income, which will be taxable. The first R500 000 of a cash lump sum taken at retirement is tax-free.

By drawing a tax-free income from your TFSA in retirement, you can considerably enhance your retirement income and lower your tax burden. But this will be the case only if you invest over the long term and do not make any withdrawals. The higher the value of your TFSA at retirement, the more tax-free income you can withdraw and the less tax you pay. 

The graph shows the growth in a TFSA in today’s terms assuming an average annual return of 4% above inflation. If you contribute the maximum of R33 000 a year (assuming that the current contribution limits stay the same until you reach retirement), you will reach your lifetime contribution limit of R500 000 in just over 15 years, when, assuming growth of 4% above inflation, your TFSA investment will have a market of value of about R690 000 in today’s terms. 

I recommend that you allow your investment to grow for as long as possible and invest in growth assets such as equities and listed property. 

From the examples below, it is clear that the longer you stay invested in a TFSA, the greater your potential tax saving.

Given the nature of a TFSA, I recommend that you use it only for long-term investing, with retirement in mind for the best results. 

Your circumstances may not allow you to have an investment time-frame of 60 years, like Max, or contribute R33 000 a year, like Sarah, but nothing prevents you from taking advantage of the tax-free nature of this account. 

A TFSA should be a part of your retirement plan, and I recommend that every South African with a tax number invests in one of these accounts. 

However, a TFSA is not meant to replace a retirement-savings vehicle, such as a company pension fund or an RA. Instead, I see a TFSA as the “unsung hero” in your golden years that can reduce your annual tax liability and free up money that can be spent or invested. 


Here are two examples of how a TFSA can provide tax relief and add value to people in retirement. 

Example 1

Sarah, who is 25, aims to contribute the maximum of R33 000 per tax year to a TFSA and stay invested until she reaches 65, when she will draw a monthly income from it. Based on the assumptions in the article, the inflation-adjusted value of her TFSA at 65 will be about R2 259 000. This could equate to a sustainable tax-free income of almost R10 000 a month, assuming an annual withdrawal rate of 5%. If Sarah needs a gross monthly income of R25 000 in retirement, she will have to draw only R15 000 from the annuity she bought with the proceeds from her company pension fund or RA. Sarah will also reduce her tax liability, because she will be taxed on R15 000 a month and not R25 000.

Example 2

The parents of five-year-old Max want to help him provide for his financial future and open a TFSA in his name. Assuming that Max’s parents contribute the maximum amount each tax year until the lifetime limit is reached, and no withdrawals are made, when Max turns 65 his TFSA could have a value of about R4 112 000 in today’s terms. This equates to a sustainable tax-free income of close to R17 000 a month, assuming an annual withdrawal rate of 5%. If Max requires a monthly income of R25 000 in retirement, he will be able to withdraw only R8 000 from his other retirement savings, and it will be on only this amount that he will be liable for tax.

Paul Roux, who has the Certified Financial Planner accreditation, is a wealth consultant at Rockfin Wealth Management, an advisory practice with offices in Johannesburg and Cape Town.