Tax free savings accounts (TFSAs) were introduced in South Africa in 2015. In just four years they have become an integral part of a multitude of investment strategies.
Many astute financial advisors see them as a useful part of a retirement savings plan. There are two primary reasons for this.
The first is that not only is all growth in these accounts tax-free, but so are any future withdrawals. This means that in retirement an investor can balance their income requirements between their annuities and their TFSA to reduce their income tax liability.
By actively managing where an investor is receiving their income from, a good financial planner can keep them in a lower tax bracket.
Secondly, investments in TFSAs do not face the same restrictions as those in retirement savings products like retirement annuities (RAs). They do not have to be Regulation 28 compliant.
This means investors can be 100% in equities in their tax-free accounts, and also have 100% offshore exposure. Many advisors see this as an effective and efficient way of mitigating the restrictions of Regulation 28, which limits investors to 75% in equities and 30% in international markets (with an additional 5% in the rest of Africa outside of South Africa).
This is a solution for investors who want more growth assets in their portfolios and to diversify away from local country-specific risks, but find Regulation 28 too inhibiting. They can use a TFSA to increase their exposure to both, while still enjoying tax-free growth on their investments.
Unfortunately, many South Africans don’t seem to have realised that this is either possible or desirable. The majority of tax-free savings accounts are held at banks, and in cash deposits.
While this might be the most accessible way for people to get TFSAs, it is far from the most effective. In fact, nobody using a TFSA for a cash deposit at a bank would have seen any benefit at all from it yet.
A previous analysis by Moneyweb showed that because South Africans already get a tax exemption on interest earned, the tax savings on a cash deposit in a TFSA will be zero for at least the first six years of the investment.
There are also many investors who don’t realise the full scope of the options available to them in TFSAs – in particular that they can invest across many asset classes, and that they are not limited to South African markets.
Investors wanting pure global equity exposure have two broad options. The first would be to set up a tax-free account with a stockbroker, an online broker, or a platform such as etfSA.co.za, and to invest into any of the number of JSE-listed exchange-traded funds (ETFs) that track international indices.
The benefits of this approach would be that it is low cost, and efficient. The number of international ETFs on the JSE has also grown significantly in the last few years, giving investors a wide range of choices, as shown in the list below.
|International ETFs available for tax-free accounts|
|Cloud Atlas AMI Big50 ex-SA||Cloud Atlas AMI Big50 ex-SA||Africa outside of SA equity|
|Cloud Atlas AMI Real Estate ex-SA||Cloud Atlas AMI Real Estate ex-SA||Africa outside of SA listed property|
|Ashburton Global 1200||S&P Global 1200||Global equity|
|CoreShares Global DivTrax||S&P Global Dividend Aristocrats Blend||Developed market dividend equity|
|CoreShares S&P Global Property||S&P Global Property 40||Global listed property|
|CoreShares S&P 500||S&P 500||US equity|
|Satrix MSCI Emerging Markets||MSCI Emerging Markets Investable Markets||Emerging market equity|
|Satrix MSCI World Equity Feeder||MSCI World||Developed market equity|
|Satrix Nasdaq 100||Nasdaq 100||US technology equity|
|Satrix S&P 500||S&P 500||US equity|
|Stanlib Global Reit Index Feeder||FTSE EPRA/NAREIT Global Reit Index||Global listed property|
|Stanlib MSCI World Index Feeder||MSCI World||Developed market equity|
|Stanlib S&P 500 Index Feeder||S&P 500||US equity|
|Stanlib S&P 500 Info Tech Feeder||S&P 500 Info Tech||US technology equity|
|Sygnia Itrix 4th Industrial Revolution Global Equity||Kensho New Economies Composite||Global emerging technologies equity|
|Sygnia Itrix EURO STOXX 50||EURO STOXX 50||European equity|
|Sygnia Itrix FTSE 100||FTSE 100||UK equity|
|Sygnia Itrix Global Property||S&P Global Property 40||Global listed property|
|Sygnia Itrix MSCI Japan||MSCI Japan||Japanese equity|
|Sygnia Itrix MSCI USA||MSCI USA||US equity|
|Sygnia Itrix S&P 500||S&P 500||US equity|
The alternative is to invest through global equity unit trusts that local asset managers have made available as tax-free investments. These can be accessed either through tax-free savings plans such as those offered by Allan Gray or Glacier, or directly from the asset managers themselves. Many index funds offered by the same providers as the ETFs above are also available in unit trust form.
For example, Allan Gray offers the following options:
|Global equity unit trusts available through the Allan Gray investment platform|
|Investec Global Franchise Feeder Fund||Global equity|
|Nedgroup Investments Global Equity Feeder Fund||Global equity|
|Old Mutual Global Equity Fund||Global equity|
|Satrix MSCI World Equity Index Feeder Fund||Developed market equity|
Other funds available directly from asset managers themselves or on different platforms include the Coronation Global Opportunities Equity [ZAR] Feeder Fund, the Stanlib Global Equity Feeder Fund, and the Prescient Global Equity Feeder Fund. This is by no means an exhaustive list, but it illustrates that investors have a range of options.
Worldwide flexible funds
For those investors who may want a little more risk protection than they could get through a pure equity fund, there are also unit trusts in the worldwide multi-asset flexible category that are available tax free. These funds ordinarily invest primarily in international equities, but they can also invest in South Africa, and in other assets such as cash and bonds.
They give the asset manager free rein to invest in whatever regions and whichever assets they believe are offering the best opportunities. As with global equity funds, these will be available through tax-free plans, or directly from the asset managers themselves.
Allan Gray offers the following options:
|Worldwide flexible unit trusts available through the Allan Gray investment platform|
|Coronation Market Plus Fund||Unrestricted|
|Foord Flexible Fund of Funds||Unrestricted|
|Investec Worldwide Flexible Fund||Unrestricted|
Again, this is not meant to be a complete list, but it does provide some examples of what is available.
While the limits on contributions to tax-free savings accounts of R33 000 per year and R500 000 over a lifetime may seem small, they do offer investors a genuine alternative to traditional retirement savings vehicles. Using them intelligently can make a big difference to their eventual outcomes, particularly because they are far less restricted in terms of where they can invest.