Are South Africans maximising the TFSA opportunity 10 years on?

A decade after their launch, Tax-Free Savings Accounts (TFSAs) have become a familiar part of South Africa’s investment landscape. Created to foster a culture of disciplined long-term saving, they remain one of the simplest and most powerful ways for individuals to grow wealth without the drag of tax.

Yet, despite their accessibility and advantages, many South Africans still misunderstand how TFSAs work, resulting in missed opportunities, premature withdrawals and sub-optimal investment choices. Conversations with industry leaders reveal a TFSA market that has matured considerably, but one that still relies heavily on advisers to help clients capture its full value.

A market of missed opportunities

When TFSAs were introduced in 2015, investors approached them cautiously. Today, nearly every bank, Linked Investment Service Provider (LISP), and asset manager offers TFSA solutions, and balances have increased significantly as early adopters approach a full decade of contributions.

According to Daniel van Andel, Head of IFA Proposition at Allan Gray, strong recent market returns have helped long-term TFSA investors build substantial balances, with some now exceeding R500 000 and a few even approaching R1m. “We are starting to see the positive impact of tax-free growth over longer periods,” he says. Investors who contributed consistently and stayed invested through multiple market cycles are now benefiting from compounding that has been completely shielded from tax.

Murray Anderson, Head of Retail at Prescient Investment Management, echoes this sentiment. He points to a clear behavioural shift in the market: more investors are moving away from cash-based TFSAs toward balanced funds and other growth-oriented investments. “The most notable behavioural change is the shift into growth assets to maximise tax-free compounding,” he observes. Monthly debit orders (often around R3 000) have also become more common, signalling increasing commitment to long-term behaviour.

Despite these improvements, both experts agree that TFSAs remain widely misunderstood – and often misused. Short-termism, early withdrawals, and overly conservative investment allocations continue to hold investors back.

Persistent misconceptions

The single most damaging misconception is around the contribution rules. Withdrawals from a TFSA cannot be replaced. Once funds are taken out, the contribution room is permanently lost. Attempting to ‘replace’ a withdrawal later in the year can also result in accidental excess contributions and a punitive 40% penalty from SARS. “Many investors treat TFSAs like transactional accounts or short-term savings pockets,” says Anderson. “But the real value only emerges after 10 or more years, when the compounding effect accelerates.”

Another misconception is the belief that cash is a safe default inside a TFSA. While cash lowers volatility, it also severely limits long-term returns. Over a multi-decade horizon, the opportunity cost is immense when compared with a diversified balanced fund or equity exposure.

A third misunderstanding relates to tax treatment. Unlike retirement funds, TFSA contributions do not reduce taxable income. “The real advantage is not the contribution – it’s the tax-free growth and tax-free withdrawals later on,” Anderson stresses.

Van Andel notes that some investors still use TFSAs for short-term goals, which tends to push them into conservative investment choices and results in premature withdrawals. This behaviour erodes the tax-free compounding runway and wastes a portion of the lifetime allowance.

A structural advantage that still goes unused

Diane Behr, Head of Operations at Foord, underscores just how advantageous TFSAs are, especially when viewed correctly. “The way to think about a TFSA is like a private pension fund,” she explains. “The structure gives you major tax advantages and encourages disciplined saving. Inside the fund you get tax-free reinvestment, and over time that makes a huge difference.”

For Behr, the biggest missed opportunity is simply that many South Africans are not using their TFSAs at all, despite their clear benefits. “One of the most important things advisers should be doing is making sure that clients use their full annual allocation every year,” she says. This extends beyond adults. Parents and grandparents can open TFSAs for children or grandchildren, giving younger generations a powerful compounding advantage from day one.

Behr also stresses that advisers must strongly discourage early withdrawals. “You don’t get the benefit back if you take money out early,” she says. The permanent loss of contribution room is often poorly understood and results in long-term damage that investors only see years later.

Her message is simple: a TFSA is one of the most advantageous savings structures available – and more people need to make use of it.

How TFSAs compare with other savings options

TFSAs are often compared with discretionary unit trusts and retirement products, but each serves a different purpose. The TFSA’s clearest advantage over discretionary investments is the total absence of tax on interest, dividends or capital gains. Over long periods, this lack of tax friction significantly boosts net returns.

Retirement funds offer compelling tax deductions on contributions and shelter investment growth from tax, but come with meaningful trade-offs. Regulation 28 limits asset allocation, access before retirement is restricted and two-thirds of the final balance must be used to purchase an annuity, where retirement income is taxable.

TFSAs, by contrast, offer complete asset flexibility, full liquidity and zero tax on growth or withdrawals. The trade-off is the contribution cap and the irreversibility of withdrawals.

For most clients, the optimal sequence remains:

• Maximise the tax deductions offered by retirement funds
• Contribute the full annual TFSA allowance
• Direct further savings into discretionary investments
• This layered approach ensures every available tax benefit is captured.

Product choice and the importance of staying invested

Behr notes that because TFSAs allow for tax-free distribution reinvestment, investors are generally better off holding growth-oriented funds where compounding can work hardest. “You’re better off compounding dividend income inside a TFSA,” she says. “If your intention is long-term investment, a growth fund makes sense.”

Investors are not locked into one TFSA product or provider. Transfers between providers are allowed without triggering tax, and switching within a platform is possible. However, Behr advises that sticking with one provider is usually simpler, unless there is a clear strategic reason to move. What she discourages strongly is cashing out entirely, once again because the contribution room can never be regained.

Across the board, the experts identify similar strategies that advisers should prioritise:

• Start early and stay invested
• Automate contributions
• Prioritise growth assets
• Use discretionary accounts for
  short-term needs
• Educate clients with simple projections.

Product evolution and the future landscape

As the TFSA market matures, product design continues to evolve. Van Andel notes that asset managers are broadening their TFSA fund offerings to suit different risk profiles and long-term goals. Allan Gray’s life-policy structure also provides estate-planning advantages: proceeds can be paid directly to beneficiaries, bypassing the delays of the estate process.

Anderson sees innovation emerging in the form of all-in-one TFSA portfolios that automatically rebalance and gradually de-risk, along with digital contribution-tracking tools that help investors avoid excess contributions and penalties.

Looking ahead, both Van Andel and Anderson expect possible increases to the annual or lifetime TFSA limits. This is particularly relevant for early adopters who will soon reach the R500 000 lifetime cap. The next few years will also see younger adults taking control of TFSAs opened by their parents, and more older investors drawing down from mature accounts to fund education, retirement income or other long-term goals.

Foundations built, but much work remains

After 10 years, TFSAs have unquestionably met their objective of encouraging long-term saving. Investors who have contributed consistently and stayed invested now have meaningful tax-free wealth to show for it. Yet the full potential of TFSAs remains underutilised. Misconceptions, premature withdrawals, and conservative allocations continue to diminish outcomes.

Here, advisers have enormous influence. As Behr emphasises, advisers should aim for two things above all: get clients invested in TFSAs and keep them invested. When used properly, TFSAs offer one of the most powerful compounding opportunities available to South Africans. The structure is sound, the benefits are proven, and the opportunity remains underused. 

With stronger education, more consistent advice and better long-term discipline, TFSAs can continue to transform the financial futures of South Africans for decades to come.