However, six years later an investor who had maximised their annual investment limit would have contributed R195 000 by the end of February 2021. Interestingly, the largest TFSA account value at 28 February 2021 on the Ninety One Investment Platform (IP) was approximately R362 000, i.e. tax-free growth of R167 000! And in aggregate, TFSA investors at Ninety One IP now have a total of approximately R1.7 billion invested, of which almost 90% is advised; this built up by a combination of the smallish annual contributions and tax-free market growth.
Maximising the long-term tax benefits of a TFSA
A key insight when setting up a TFSA is that the underlying investment portfolio should be consistent with the long-term nature of the investment. Based on the current annual limit, it will take 15 years to reach the lifetime contribution limit of R500 000. And while TFSAs allow for withdrawals at any time, doing so should only be as a last resort. This is because the amount taken cannot be replaced and therefore that allowance is lost forever.
Importantly, the tax benefits of TFSAs compound exponentially over time. Therefore, it appears to make no sense for an investor to use a TFSA for an investment horizon of less than five years. Jaco van Tonder, Director of Advisory Services at Ninety One has shown here that after twenty years the tax-saving represents over 20% of the investor’s total accumulated value. With short-term money market rates now as lows as 3.5%, individuals under the age of 65 can invest approximately R680 000 in the money market before the interest that they earn exceeds the current annual interest exemption of R23 800. This makes a money market investment (with low/no volatility), and not a TFSA, the ideal vehicle for an emergency fund, a key component of any well-constructed financial plan.
An analysis of the Ninety One IP TFSA book shows that investors and their advisors agree; 90% of the TFSA assets on our platform are invested in offshore, equity or multi-asset (balanced or flexible) funds. And at 20%, the most supported fund by some margin on Ninety One IP is the Ninety One Global Franchise Feeder Fund, which reflects investors’ appetite for increased offshore diversification. As Figure 1 shows, this has also provided investors with a good investment outcome.
In this example, on 1 March of each year an investor invests the maximum annual contribution into the Ninety One Global Franchise Feeder Fund via their Ninety One IP TFSA. The blue line in the chart represents the sum of the investor’s annual contributions, i.e. R30 000 for the period 1 March 2015 to 28 February 2016, R60 000 for the following year, etc. Over the full period (1 March 2015 to 28 February 2021), the total invested amount is R195 000. The orange line represents the growing total value of the TFSA investment over time. As at 28 February 2021, the accumulated value is R328 566, resulting in a tax-free annualised return of 15.5%.
Importantly, the tax benefits of TFSAs compound exponentially over time. Therefore, it appears to make no sense for an investor to use a TFSA for an investment horizon of less than five years.
Figure 1: Illustrating the growth on your annual TFSA contribution
In six short years, early adopters are already reaping the material benefits offered by TFSAs. However, it is critical that investors stay the course and whenever possible invest the maximum allowable amount at the beginning of each tax year. If this is not possible, as we point out here, it is preferable to initiate a monthly debit order rather than wait until the end of the tax year to contribute. The earlier you start earning investment returns, the earlier those investment returns start compounding, tax-free!
For more about tax-free investing, please visit www.ninetyone.com/tfsa. DM/BM
This article was written by Paul Hutchinson, Sales Manager, Ninety One