Tax free savings accounts – Which offer you the best value?

Introduced on 1 March 2015 as part of an initiative to remedy the poor savings culture in South Africa, tax free savings accounts (TFSA) are offered by all five major local banks such as First National Bank (FNB), Nedbank, Absa, Standard Bank, and Capitec.

Where this differs from traditional savings accounts is that TFSA’s are savings vehicles that allow for the growth as well as the return to be tax-free, meaning you have the potential of saving and earning more. 

An example of this would be if you were to invest a sum of R1000 and have it grow to R2000 over a certain period of time. In a TFSA this R1000 growth would not be taxed, as with traditional savings accounts. Instead you would receive the full R1000 benefit. This is a big win for someone looking to save. 

Which Tax-free Savings Account is best?

This week Justmoney compares TFSA’s across the five banks mentioned to see which bank allows for the most savings potential and which is cheaper to utilise.

Tip: Use our free online budget calculator to see how much you can afford to save, click here.

*The below amounts were correct at the time of publication.

And the winner is…

Taking the above statistics into consideration Capitec leads the pack when it comes to interest rates as their interest rate span is capped at 7.71% while FNB is capped at 7.15% and Absa at 7.25%. Standard Bank trails behind at 6.65% and Nedbank only confirms the interest rate upon retrieval of funds.

In terms of opening balance Capitec has the lowest barrier to entry with a required opening balance of R1 while Standard bank comes in at R250, Nedbank at R500 and the other two at R1000 minimum.

Another noteworthy takeaway is the withdrawal notice period. While Capitec, Standard Bank, and Absa offer the most convenience with their anytime withdrawal, Capitec proves the most expensive with a R300 penalty. This while the other two allow consumers to make an early withdrawal for free. Nedbank and FNB prove stricter as Nedbank requires a 24-hour notice and a R50 penalty and FNB a 32-day notice period.

Understand the facts about Tax Free Savings 

In keeping with the concept of a TFSA, which is to encourage saving, Capitec proves the most accessible option with the highest interest earning potential.

As of March 2017, the decision was made to increase the amount of money that South Africans can contribute towards a tax-free savings vehicle annually from R30 000 to R33 000. The significance is that this amount is tax free.

What’s important to note is that South Africans are not limited to a set number of tax-free savings vehicles. Which means you can open and hold as many as you please and is manageable. This is often because each savings vehicle can only hold R500 000 which is the reason many opt to open more.

If you have more than one TFSA as of March 2018, account holders are able to transfer between their accounts and savings vehicles without being penalised.

However, the R33 000 tax-free cap still stands for each account.

Read the fine print

It’s also important to look at the terms of investment. According to an in-branch Absa consultant, the investment terms determine the benefit you’ll have.

“There are set investment terms offered to maximise the interest earning potential of your savings or investment. We encourage clients to adhere to these terms and not be tempted to withdraw their money prematurely as this affects the return on the investment as a whole,” says the consultant.

Often clients are tempted to withdraw from their TFSA to fill a gap, whether it be medical bills, or simply not being able to make it to month end. This may be of help momentarily but in the long run it cripples your saving ability, and your discipline when it comes to being able to save, says a Nedbank in-branch consultant.

If you’re interested in finding the best return on your investment, click here.