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This site is for retail investors. We recommend that you seek independent financial advice to ensure our Funds are suitable for your investment needs. Please remember capital is at risk and past performance is not a guide to the future.

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Investment views

TFSA: It’s all in a name

7 January 2020
Author: Jaco van TonderAdvisor Services Director

The tax advantage of a tax-free savings account (TFSA) can be very powerful. Imagine holding off on buying yet another toy or computer game this month and rather investing that money in a TFSA on behalf of your child?

There are some practical considerations, however, that we do need to highlight. Remember, you’ll only save tax on your investment returns in a TFSA if you’re liable to pay tax as an individual. Children are rarely liable for tax until they are deep into their twenties. They are also not going to pay a significant amount of tax until they are close to 30 years of age.

The key question therefore is when you expect the TFSA to be cashed in – which really is about how you plan to use the TFSA proceeds. For example, are you saving to assist your child to start their own business when they are in their early thirties? Or are you saving for them to go on a year-long sabbatical after finishing high school?

In the case of the first example, a TFSA in the name of the child is a great option. But not in the case of the second example. Remember, a TFSA allows for a lifetime investment limit of only R500 000. If you start saving when your child is five years old, and the full investment is withdrawn at age 22, you would have exhausted your child’s tax-free savings allowance forever – without them receiving much tax benefit in return. This is because the child’s tax liability up to that point would have been minimal.

Therefore, if the goal of the investment is to pay out before your child becomes a taxpayer, you could rather take out the TFSA in the parent’s name, or take out a traditional investment (i.e. not a TFSA) in the name of your child.

Get the right advice

Whether you ultimately pick a normal investment vehicle or a TFSA, it is never too early to start saving for your and your children’s future. Starting early is a key ingredient to investment success.

We always advocate the benefits of independent financial advice – if you have an existing advisor, ask them for guidance. However, many people starting out may not yet have a trusted advisor, and to these investors my recommendation is to keep it simple. Look for TFSAs from an institution that has a reputable brand or with which you have an existing relationship.

Jaco van Tonder
Jaco van Tonder Advisor Services Director

Important information

All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. Collective investment scheme funds are generally medium to long-term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the Manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd is a member of the Association for Savings and Investment SA (ASISA). This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Investment Management Services (Pty) Ltd and Investec Asset Management (Pty) Ltd are authorised financial services providers.

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