TFSAs and RAs:
Why it pays to invest early in the tax year

May 3, 2022 | Articles, Personal Finance

The earlier you invest, the longer you’ll be invested


Editor’s note

This article was originally written for a UK context by James Norton, who is the head of financial planners at Vanguard Europe.  It has been adapted for the South African context to take into account investments into local tax-efficient vehicles, as well as the South African tax regime governing such investments.


If you are interested in reading the original article to gain insights into how tax-efficient investments are used to grow one’s wealth in a UK context, click the link below.

Bear in mind that investments on the Vanguard UK platform are only available to UK residents.

A NEW tax year has begun—and with it, the chance to make early use of your 2022/23 tax-free investment allowances.

Now you may be thinking: Why hurry, when there’s the best part of a year still to go? However, the counterargument is, why delay when your chances of investment success are improved the more time you are invested? Or as the old saying goes: It’s not about timing the market, but time in the market, that counts.

In fact, our calculations show that you could potentially lose up to just shy of R200 000 over 25 years by waiting until the end of each tax year to invest, rather than investing at the start.

Consider what would happen, for example, if on 1 March 2022 you were to invest the annual maximum of R36 000 that is currently allowed in a Tax-Free Savings Account (TFSA) and continue to invest R36 000 at the beginning of every tax year, earning a hypothetical annual investment return after costs of 9%.

Given that the lifetime investment limit for TFSAs is R500 000, you’d ‘max-out’ your allowable contributions on 1 March 2036 (i.e. after 14 years, with your final contribution being R32 000 to take you up to the lifetime limit).

Fast-forward a further 11 years, and by 28 February 2047 you’d end up with more than R2,4 million in your TFSA—R500 000 of invested capital, and another R1,9 million in growth. Wait until the end of this tax year and every subsequent tax year to invest the same amount of money, though, and you would end up with just R1,7 million in capital growth. That effective delay of just one year will end up costing you R200 000 in lost returns!

Early, and often
Encouraging people to invest early and often is in keeping with Vanguard’s mission to help investors achieve superior outcomes, and all the more so when it means taking advantage of legislation that is designed to save them tax. Here at Personal Finance, writing in a South African context, we agree wholeheartedly!

Therefore, if you have a lump sum of money (virtually) collecting dust in a bank account—money that is more than your rainy-day emergency cash, and part of your longer-term savings—why not put it to work in the market sooner rather than later via your TFSA?

With the start of each new tax year, everyone has a shiny new R36 000 TFSA allowance. This means you can invest this money in a variety of investments (including shares and bonds), up to the respective annual and lifetime caps, and not have to worry about paying tax on any of the income or capital gains you might make on these investments.

It potentially gets even better with a retirement annuity (RA)—always assuming, that is, that you’re happy to lock-in your money until you’re at least 55. This is because your RA fund not only attracts no income or capital gains tax during the accumulation phase; you also get a tax rebate on your contributions!

Your contributions to retirement funds are eligible for tax relief of up to 27.5% of your annual earnings (capped at R350 000 per annum). However, there is no overall annual or lifetime cap (unlike with TFSAs)—any contributions in excess of the tax-deductible amount is carried over into future years.

Furthermore, when you retire from the fund, any contributions that have not yet been allowed as a deduction can be paid out as an additional tax-free lump sum (in addition to the basic lifetime tax-free allowance of R500 000, subject to the overall lump sum limit of one-third of your total fund).

When to start?
It’s never too soon to invest – but it can sometimes be too late, depending on your goals. This is because the less time you give it, the less potential there is for compounding to work its magic on your behalf.

It’s not dissimilar to the case against so-called ‘rand-cost averaging’. Granted, no-one wants to accidentally buy at the top of the market—but that said, you can’t reliably predict the future anyway, and history shows that markets tend to be more up than down. Therefore, our view is that if you have money to invest, best invest it sooner rather than later.

What is compounding?
Compounding is a mathematical phenomenon that helps your investments to grow more quickly, by paying a return not just on the money you invest, but also on all the money you previously invested—and on the money that, in turn, you made on those earlier investments.

It’s akin to a sort of snowballing effect.

Of course, the potential for your cash savings to compound is not what it used to be. We all need cash for emergencies, but with interest rates as low as they are at the moment (not to mention the bank charges on savings accounts), your cash savings aren’t going to grow that quickly—even with compounding.

It’s potentially a different story if you invest your money through an equity-based TFSA or RA. This is because the potential return from equities is far greater than from cash investments.

No-one can guarantee, of course, that you’ll make money in an equity-based TFSA or RA, as the value of your investments can fall as well as rise, which means that over the shorter-term you could potentially get back less than you put in.

However, these investments are intended to be longer-term (to at least age 55 in the case of RAs), and although one can withdraw funds from a TFSA at any time, you are best-served by staying invested for the long haul—particularly since withdrawn contributions cannot be ‘replaced’ under the annual and lifetime limits.

That said, given that real returns (i.e. over and above inflation) on South African equities have averaged 7% per annum over a period of 120 years (based on the Credit Suisse Investment Returns Yearbook 2020 using data from 1900 to 2019), there’s every reason to believe that the 9% figure used in our calculations is, if anything, somewhat conservative.

So now that we’re two months into a new tax year, why waste the rest of the year by leaving it until the last day on 28 February 2023 to invest in your TFSA or RA, when those extra 10 months could make a big difference to your wealth in the long run?

Steven Jones is a registered SARS tax practitioner, a practicing member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.