Tax-free savings accounts vs retirement annuities: What to consider for your long-term savings?

 Tax-free savings accounts (TFSAs) were introduced by National Treasury to create a savings culture in South Africa. This account allows people to save without having to pay tax on the returns earned, making it a perfect long-term investment strategy. Those who have not exceeded their R36 000 annual contribution allowance to a TFSA have an opportunity to do so before the end of February this year.

The current thresholds for TFSAs are as follows:

  • A maximum of R36 000 per annum.
  • A maximum of R500 000 per lifetime.


TFSAs allow any investor, regardless of their income level, to earn interest on a range of investments or savings instruments without having to pay income tax on the returns. A tax-free account can be opened in a few quick steps. You can also have multiple accounts with different financial institutions should you choose to do so; however, you must keep the thresholds in mind as exceeding the allowed contributions results in a tax rate penalty of 40%.

TFSAs are flexible, meaning you can add or withdraw funds when needed – just remember that withdrawn funds are deducted from your contribution limit and cannot be replaced. The accounts offer a wide variety of asset classes to invest in, such as shares, unit trusts and money market accounts. High-risk investment options are excluded, making this investment vehicle well within the risk parameters of everyday investors looking to grow their money and keep up with the increased cost of living.

Discretionary TFSAs allow you to select the assets you wish to include in your tax-free investment account. You may invest in a basket of shares up to an amount of R36 000 per year and total of R500 000. The R500 000 is purely the maximum capital contributions allowed to be invested, not the cap on returns. After R500 000 has been invested the account can continue to grow tax free, with no limit on the potential returns.

When money is withdrawn from the TFSA that amount is deducted from the R500 000 maximum capital contribution, meaning this vehicle works best for long-term goals of over 15 years.

The R36 000 can be contributed over the year in instalments or as a once-off payment. Thus, if you have not invested into a TFSA this year, it would make sense to do so now for the full amount of R36 000 to tax maximum advantage of the tax-free returns.

Another perfect retirement vehicle is a retirement annuity fund.

RAF contributions

A retirement annuity fund (RAF), like a TFSA, is a long-term savings vehicle that is set up to be accessed during retirement. An RAF allows you to grow your savings tax-free, like a TFSA, with no tax on interest, dividends, or capital appreciation. There are, however, a few differences on the contributions and withdrawals. When putting money into an RAF, you must wait to turn 55 years old before converting your contributions into monthly annuities. Should you withdraw funds before that you will be heavily taxed. When investing into an RAF your money is tied up; thus, an RAF has been designed specifically with retirement in mind as the money can only be used once the investor has reached retirement age.

There is a massive tax benefit to an RAF in that all contributions are tax deductible up to a maximum of 27.5% of your taxable income or R350 000, whichever is less. The tax deduction effectively acts as tax savings. There are also no contribution limits and any non-deductible contributions will be rolled over and deducted in the following tax year.

Like a TFSA RAFs have access to multiple asset classes, depending on the risk profile of the investor. However, no high-risk assets are used in an RAF as the vehicle has been designed to achieve returns in the most sustainable way over time.

RAF contributions can be made from as little as R500 per month and are an absolute must for long-term retirement plans with tax benefits on both returns received and deductions made. FNB is also offering no fees for two years when investing and saving through an RAF with us.

So, which one?

Both these vehicles have similar characteristics. The main difference, however, is that an RAF is specific to retirement and should be left to vest until the investor is 55 years old, where a TFSA is a long-term savings vehicle with no early penalties – making this more appropriate for long-term goals, such as saving for your child’s education.

The best option for long-term savings would be to contribute to both if possible. Combining an RAF with a TFSA will reduce your income tax while increasing your savings.

Think long term. Make this part of your medium- and long-term investment strategy for 2021. South Africans are using TFSAs and RAFs to help save for retirement, supplement other income, pay for their children’s education and assist in bond payments. Setting up an annuity such as this can go a long way in achieving investor goals and growing your funds. Take advantage of both opportunities today.


Nicholas Riemer,is the Investment Education Head, FNB Wealth and Investments.

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