Calls for higher tax-free savings limits ahead of budget

Old Mutual has called on National Treasury to raise the contribution thresholds on tax-free savings accounts (TFSAs), arguing that current limits constrain their effectiveness as long-term savings tools.

The group has urged Finance Minister Enoch Godongwana to increase the annual contribution ceiling from R36 000 to R40 000, and the lifetime cap from R500 000 to R600 000 when he tables the national budget next Wednesday (25 February).

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TFSAs were introduced on 1 March 2015 to incentivise savings in an attempt to boost South Africa’s weak savings culture.

Lizl Budhram, head of advice at Old Mutual Personal Finance, says tax-free investment accounts can play a critical role in helping individuals strengthen their retirement outcomes – “but only if the framework allows sufficient room for meaningful contribution limits”.

“Tax-free investment accounts were introduced with the right intent, but more than 10 years on, the contribution limits need to better reflect the foundational objective behind their introduction,” Budhram says, adding that higher limits would extend the investment horizon and enhance long-term outcomes.

At current levels, an investor contributing the maximum each year would reach the lifetime cap in roughly 14 years.

This restricts the period over which tax-free growth can accumulate, Budhram notes.

Gradual limit increases 

Annual limits on TFSAs have risen gradually – from R30 000 initially to R33 000 in 2018 and R36 000 in 2021 – but the lifetime cap has remained unchanged at R500 000.

Returns within the account – including interest, dividends and capital gains – are exempt from tax, allowing compounding to happen without erosion.

Read: Tax-free savings accounts – 10 years down the line

However, excess contributions trigger a 40% penalty, and withdrawals cannot be replaced without using up contribution room.

Budhram cautions that the benefit applies to growth inside the account, not to repeated withdrawals and reinvestment, which are treated as new contributions and may breach limits.

Underused but powerful

Investment managers say that despite these advantages, TFSAs remain underutilised in South Africa.

Diane Behr, director at Foord Asset Management, describes them as one of the “quieter building blocks of long-term investing” that work steadily over decades.

She notes that the structure offers “something rare in investing” – growth that is never taxed.

The real benefit, however, comes from consistent contributions and time.

Over long periods, untaxed compounding can materially improve outcomes compared with taxable investments.

Behr argues that TFSAs are best suited to long-term, growth-oriented portfolios rather than low-return products such as cash, because withdrawals cannot be replaced and the structure rewards staying invested for 15 years or more.

Behaviour improving

Data from Ninety One suggests that investors are increasingly treating the accounts as long-term vehicles.

Paul Hutchinson, sales manager in the firm’s South African advisor team, says TFSAs should not be used as emergency funds because the allowance is “use it or lose it”.

Withdrawals have declined sharply: almost 12% of Ninety One Investment Platform TFSA investors accessed funds over the previous two years, but the proportion has fallen to below 3%, with fewer than 0.5% making full withdrawals.

The trend suggests growing awareness that accessing funds early undermines the tax-free compounding benefit, he says.

Read: Retirement annuity vs tax-free savings account vs bond

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