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No, the TFSA, is the best investment you can make as a South African, if you know the rules and employ them effectively!


TFSA, for those that may not know, is a Tax-Free Savings Account


One thing South Africans should comprehend well, is that if you have material amounts of money, sitting in either a bank or investment account, one way or another you are going to have to pay tax on the income or capital growth from it.

You may already know about capital gains tax, dividend withholding tax and tax on interest. It’s all sliced and packaged differently, depending on where and how the money is earned, but one thing is certain: if you’re earning money or growing your capital, you are going to be paying tax. Sometimes a substantial amount too! It’s easier to accept reality than lament it. Fortunately, there are legal ways and smart ways that South Africans can reduce their tax bills. And then there’s the Tax-Free Savings Account (TFSA).

There are a number of situation-specific ways to minimise your tax responsibilities generated from your savings or investments activities by applying specific solutions to your portfolio or needs. You’re not going to completely eradicate all of your commitments to the commissioner, but you shouldn’t be paying more than you are legally obliged to either! The most under-utilised instrument out of all is a slept-on gem, the TFSA. The possibilities of applying the right type of strategy to your TFSA and its allowances are widely misunderstood and, in most cases, require patience or an appetite for risk to bear fruit. But once you understand and unlock the possibilities, your only regret will be not having started the journey to use it effectively sooner.

Introduced in 2015, the TFSA is an often-misunderstood investment vehicle because of how it has been packaged and promoted in South Africa. It was introduced to encourage South Africans to save, an important endeavour when you consider that, across the board, we are not net savers.

To this end, South Africans don’t have to pay income tax, dividends tax or capital gains tax on the returns from TFSA investments, but we are limited to a maximum annual contribution of R36,000 as well as a lifetime limit of R500,000.

The UK millionaires

The UK version of the tax-free account is called an ISA. ISAs were introduced in the UK in 1987, and the first ISA millionaire was minted in 2003. A private investor by the name of Lord Lee who did so purely by investing in shares (think higher risk, greater return – we’ll come back to this later).

As of 2023, there are now over 4,000 ISA millionaires in the UK and its largest tax-free investment account sits at £8.5m, 37 years later. While the UK’s annual limits have gradually increased from £2,400 in 1987 to £20,000 today, the growth within the account has been achieved to a far greater extent through the compounding effect of investing than through the tax savings over multiple years.

The true benefit of TFSAs

This reveals the real function of a tax-free account. Unfortunately, it’s not to help solve the savings crisis in SA, as is promoted. For 99.9% of South Africans today, putting R36,000 in a money market account will yield little to zero tax implications anyway. For the 0.1% where it would have an effect, they’d owe the commissioner approximately R1,296. Respectfully, if you sit in that 0.1%, this sum would be the least of your concerns.

The purpose of a tax-free account is to invest as opposed to save over the long term with the specific goal of becoming SA’s version of an “ISA millionaire” yourself. Your long-term proceeds can then hopefully be used to supplement your retirement income.

The initial annual allowance for a tax-free account in 2015 was R30,000 per annum, and it’s currently at R36,000. The threshold has risen by an average of 2% a year since it was introduced. While we can’t assume this trend will continue, it probably will do so over time.

You can invest your TFSA in a variety of instruments:

  • Fixed deposits
  • Unit trusts (collective investment schemes)
  • Linked investment products
  • Exchange traded funds (ETFs) that are classified as collective investment schemes.

Were you to start a brand-new tax-free savings account today, and place it in a fixed-income deposit with whichever bank of your preference, you could get up to 8% a year return in this account. At this rate, with compound interest it would take 28 years to accumulate a fund of up to R4.4m.

Were you to invest intelligently, however, and take some risk by taking advantage of both local and offshore equities, you’d benefit by exposing a portion of your investment to 99.6% of the global economy, through companies such as Google, Amazon, Coca-Cola. Given that we are an emerging economy, you’d also have the benefit of investing in a hard foreign currency, hedging any future depreciation of the rand over time against other major currencies. Historically, this has netted investors an additional 3% per year on average over the last 10-20 years.

The tax benefit of not paying capital gains tax and dividend withholdings tax in your investment cannot be understated. Given how these investments have performed historically, investors have the potential to grow their TFSA investment to R4.4m in just 22 years – six years earlier than a fixed-deposit investment.

If you stayed the distance for 28 years anyway, your capital could grow to R8.9m over the same period. That’s a 100% potential gain, highlighting the power of investing over saving.

The asymmetric advantage means you can invest aggressively

The R36,000 TFSA allowance should be your most aggressive investment in your portfolio. If you hit it out of the ball park you have ZERO tax liabilities. If it flops or returns a mediocre ROI, you are protected given that your outlay is limited to R36,000 per year and R500,000 for your lifetime. While you should never gamble with your savings or investments, this is the closest you can ever get to rolling the dice in a casino with very little down-side risk and an asymmetrical advantage to your benefit in the form of zero tax payable.

Have you started yet?

South Africa doesn’t have its first tax-free millionaire yet. For those who were fortunate enough to understand and implement this information in 2015, the largest tax-free account today sits at approximately R500,000. This account should reach the million-rand mark by 2029. If you haven’t already started it, your journey should begin today. Five years from now, when the announcement is made parading our first achievers, the last thing you can ever say, is that nobody ever told you so.


Article by:  Munya Shumba, Financial Advisor

If you would like further information, please contact Munya as follows:





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