R324,324 tax-free savings gap in South Africa

Many stakeholders have called on Finance Minister Enoch Godongwana to increase the contribution cap for tax-free savings investment accounts.

The National Treasury introduced tax-free savings accounts (TFSAs) to encourage South Africans to save more by removing the tax burden on the growth.

Using a tax-free savings account protects South Africans from tax on interest earned, dividends received, and capital gains.

People can withdraw their money at any time. However, any amount withdrawn still counts toward their lifetime contribution limit.

When tax-free savings accounts were first introduced in March 2015, there was an annual limit of R30,000 and a lifetime cap of R500,000.

In March 2017, the annual limit was increased to R33,000, and it was raised again to R36,000 in March 2020.

However, the lifetime limit remained at R500,000 since the National Treasury introduced tax-free savings investment accounts in 2015.

When the lifetime limit is adjusted for inflation, the real lifetime limit should have been increased to R824,324.

This means that, in real terms, the lifetime limit for tax-free savings investment accounts is R324,324 lower than in 2015.

Simply put, South African investors will hit their cap much faster when they contribute the same percentage of their salary each month.

Using the 2015 limits, it would take a South African investor 17 years to reach his lifetime tax-free savings limit.

Adjusting the R30,000 annual cap for inflation means that an investor would hit the limit in only 10 years.

If the National Treasury wants to encourage South Africans to continue to invest, it should significantly increase the annual and lifetime limits.

Calls to increase the tax-free savings investment account limits

Old Mutual has called on Finance Minister Enoch Godongwana to increase the annual contribution and lifetime caps.

The firm would like to see the annual contribution to tax-free savings investment accounts increased to R40,000, and the lifetime limit to R600,000.

Old Mutual said it was time to increase the limits to reflect economic realities and improve long-term financial and retirement outcomes.

Lizl Budhram, Head of Advice at Old Mutual Personal Finance, said these accounts play an essential role in helping individuals strengthen their retirement outcomes.

However, the R500,000 lifetime restriction limits the long-term usefulness of these accounts as complementary retirement savings vehicles.

She said the National Treasury introduced tax-free investment accounts with the right intent in March 2015.

However, more than ten years on, the contribution limits need to better reflect the foundational objective behind their introduction.

“When used alongside retirement funds and preservation vehicles, these accounts allow investors to build tax-efficient savings,” she explained.

She added that these tax-free savings can supplement retirement income and provide flexibility later in life.

“An increase to R40,000 a year, which works out to just over R3,300 a month, would remain disciplined and accessible for many savers,” she said.

“Increasing the lifetime limit to R600,000 would also extend the investment horizon, allowing investors to benefit from tax-free growth for longer.”

While Budhram has called for higher investment allowances, investors do need to be careful in how they use the accounts.

Exceeding the annual limit can be costly, as any excess contributions are subject to a 40% penalty tax.

Issues can also arise when investors withdraw returns and then reinvest those amounts into a tax-free investment account, as this is seen as a new contribution.

“The tax-free benefit applies to the growth within the account, not to repeatedly withdrawing and reinvesting funds,” said Budhram

“Investors need to be careful when moving money in and out, as any amounts withdrawn cannot simply be replaced.”