This proliferation of options and the accompanying wave of good-news marketing material can be confusing. Jaco van Tonder, Advisor Services Director at Ninety One, sets out key considerations for investors.

1. The basics

TFSAs were introduced in 2015 to encourage individuals resident in South Africa 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 (CGT) or income tax on the dividends and interest received on your investment.

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.

You can withdraw money from your TFSA at any time without penalties, but once you’ve reached your life-time maximum allowance, you can’t top up again after a withdrawal.

2. A TFSA is not the only tax-efficient savings option

A lot of the media coverage on TFSAs appears to take people’s eyes off the fact that the first savings priority for any investor remains their contribution to some type of registered retirement fund (via their employer or a retirement annuity). As a rule of thumb, investors should first provide for an adequate contribution to their retirement fund before taking out a TFSA.

Secondly, investors should remember to use their annual tax-free interest exemption. At current money market rates of between 6% and 7%, an investor in South Africa can keep up to R350 000 in a fixed income fund before paying any tax on the interest. Ideally, this allowance should be used to set up an investor’s emergency cash pool.

3. TFSAs should be viewed as long-term investments

Investors typically only start seeing the returns of their TFSAs matching or even exceeding their contributions after about ten years. After 20 years the value of the tax saving becomes substantial relative to the size of the original contribution.

It is important therefore not to withdraw money unnecessarily from your TFSA, especially as you can’t top up once you’ve reached your maximum lifetime contribution.

4. Pick the appropriate underlying investment

Given the long-term nature of the TFSA, investors should aim to structure the underlying portfolio for more growth. TFSAs are also not restricted – as is the case with pension funds and retirement annuities – in terms of the asset classes in which the money can be invested.

We believe the asset allocation should reflect this long-term view and have a higher allocation to equities and offshore exposure rather than to cash, which provides a much lower return over the long term.

It seems that a good starting point for most TFSA investors is to have a look at unit trust funds from the “ASISA South African Multi-Asset: High Equity” category, or something similar. These funds have historically produced attractive long-term risk-return trade-offs.

Given that TFSA investment portfolios are not restricted by regulation and are long term in nature, investors with time horizons exceeding ten years should even consider more aggressive investment portfolios. The most popular investment portfolio for the Ninety One TFSA has been the Ninety One Global Franchise Feeder Fund, an offshore equity fund, which makes up twenty percent of total assets in the Ninety One TFSA product.

5. Keep it simple

Most large South African financial services companies have launched their own TFSA products, offering a range of options. Setting up a TFSA might sound like a daunting task. But it should not be – the best strategy really is to keep it simple.

There are several benefits to picking an investment platform, such as the Ninety One Investment Platform, for TFSAs:

• Investors have access to a wide choice of local and international funds covering all risk profiles.
• Investors can simply switch between funds on the platform if needed, avoiding the need for messy TFSA transfers.
• Investors and advisors can monitor contributions to TFSAs centrally to ensure they do not exceed their annual TFSA contribution limits.
• Investors can easily see a consolidated view of their entire investment portfolio, which might include a retirement annuity and discretionary investments in addition to a TFSA.

DM/BM