Since the introduction of TFSAs on March 1 2015 the annual interest exemption (R23 800 for individuals younger than 65 and R34 500 for people 65 and older) has remained unchanged. As a result, retirees who earn interest in excess of the exemption may have turned to TFSAs to maximise their tax-free interest income.
The pensioner in question invested R30 000 at the end of the 2016 tax-year and another R30 000 at the start of the 2017 tax year, thereby effectively investing R60 000 in a TFSA over the tax-year ending February 28 2017.
But when he recently received his statement, he was extremely disappointed to learn that the administration and advisor fees on the account exceeded the return by over R300.
“This has probably turned out to be the worst investment I have made in 50 years of investing,” he tells Moneyweb.
On closer examination it turns out that although he invested in a TFSA, the underlying investment was a Regulation 28-compliant, low-equity multi-asset unit trust, with a CPI plus 5% per annum benchmark over rolling three-year periods. This was clearly not the fixed deposit-type investment the pensioner thought he was exposed to. The unit trust in question has a very good long-term track record, but it underperformed its benchmark quite considerably over the past year.
While a TFSA is a generic, overarching investment vehicle that is offered by various financial services firms including banks, asset managers and long-term insurers, not all of these investments are created equal.
Think of a tax-free savings account as a piece of gift-wrapping paper used by a parent wrapping gifts for Christmas. The parent (represented by National Treasury in this analogy) will wrap all the presents with the same gift-wrapping paper (create the regulatory framework for offering the TFSA), but all the children will receive different toys (assets or investments inside the TFSA) depending on their age and interests.
The gift-wrapping signifies that it is a gift, but its usefulness will depend on how the toy inside the wrapping matches the child’s expectations.
National Treasury allows product providers to offer TFSAs, but the account on its own doesn’t generate a return. It only ensures that the investment returns – which are generated by the underlying assets in the account – are tax free (thereby effectively adding to the return).