How fees impact your tax-free savings account

The tax-free savings account (TFSA) is an investment account first introduced in South Africa in 2015 as a way of encouraging South Africans to save without the burden of taxation. Tax-free savings accounts are long-term investments which allow returns to potentially compound without the need for paying any tax, making them a powerful investment tool.  

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There is no capital gains tax, interest tax or dividends withholding tax deducted. Careful attention should, however, be paid to the fees charged on your TFSA. High fees have the effect of diminishing returns, especially when they are compounded over time.  

10X simplifies your investments with low fees, a superior track record and a straightforward investment approach. In this article, we’ll dive deeper into TFSAs and cover exactly how fees work, the compounding effect of high fees on your TFSA and strategies to mitigate the effects of fees on your tax-free savings account.  

The TFSA advantage and the fee trap 

A tax-free savings account isn’t a savings account in the traditional sense; it is actually an investment product. Of course, the most notable advantage of a tax-free savings account is that you don’t need to pay any tax on returns or withdrawals. You won’t be charged interest tax, dividends, withholding tax or capital gains tax.  

There are restrictions placed on the contributions that you are able to make to your TFSA. You can contribute up to R36,000 per annum (R3000 per month) and R500,000 per lifetime. Always make sure that you do not exceed these limits, as this will result in penalties of 40% being levied on the excess contributions. 

There are no restrictions on withdrawals, and you do not pay tax on withdrawals. Keep in mind that a TFSA should be seen as a long-term investment, so withdrawals should still ideally be avoided if possible. Remember, once you withdraw funds, you can’t add them back. This means less of your savings will potentially compound and grow over time.  

Even though returns are exempt from tax, you are still liable to pay fees on your TFSA. Just as with returns, these fees are compounded over time. These compounding fees can substantially affect your investment’s growth. Investors often don’t realise the effect of fees on the growth of their TFSA. Fees of 3% may not seem like a lot, but when these fees are compounded over time, this can impact your capital amount in the long term. 

Compounding fees vs. compounding growth 

Let’s look at an example of 1% in fees vs 3% in fees, and assume the following:  

Monthly contribution: R3,000 

TFSA lifetime cap: R500,000 (reached in 13 years and 11 months)  

Investment term: 30 years 

Annual return: 12% 

Annual inflation: 6%  

Remember, contributions stop after reaching the cap, but the money stays invested for the full 30 years. The returns are compounded monthly and adjusted for inflation to determine real values. Fees are deducted before inflation is accounted for. 

Scenario 1 (1% in fees): After 30 years, the final investment value is approximately R1,438,627 

Scenario 2 (3% in fees): After 30 years, the final investment value is approximately R901,248  

We can see a difference of around R537,379 in final investment value off just a 2% difference in fees, highlighting how compounding fees impact the overall growth of the TFSA. This example is for illustrative purposes only, and actual results may vary. You can learn more about how fees impact investment growth here.  

10X has a transparent and low fee structure, which is simple and easy for all investors to understand. Most retirement products charge a single fee of less than 1%, which reduces with the more that you invest. To view our most up-to-date fee information, visit our website. 

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Understanding the types of TFSA fees 

There are a few typical fees that you may see charged on your tax-free savings account. These fees are: 

Administration fees: These are the fees paid for the administration of the fund. These are related to activities such as tax, compliance and reporting. 

Advisor fees: These are the fees charged by an advisor for their advice and services. There may be both an initial and an ongoing fee. 

Management fees: These are the fees charged for the management of the fund. 

Other: These are fees such as early exit penalties, which may apply to some vehicles. 

The Effective Annual Cost (EAC) of an investment is a metric introduced by ASISA as a means to see the total charges, costs and fees that are involved with owning an investment over a one-year period of time. This information can then be used to compare with the fees and costs charged by other service providers.   

All factors being equal, a higher EAC may mean that there are less returns available to be reinvested and potentially compounded in growth over time. On the other hand, a lower EAC may mean that there are more returns to be reinvested to potentially grow and compound over time. The EAC is just one factor that needs to be considered when evaluating different service providers before making a final decision. 

10X offers a free EAC calculator as a part of our free online suite of tools. The EAC calculator can be used to compare and contrast with your existing costs. This can help you make an informed decision regarding whether or not you need to switch providers to save on fees.  

We also offer a transparent and low-fee tax-free savings account, thus allowing for more of your returns to be invested and potentially compound and grow over time. Please visit our website to find out more about our TFSA or speak to one of our helpful and experienced investment consultants.  

Making use of index-tracking to reduce costs 

Index tracking is when a benchmark index is mimicked in an effort to obtain the same returns as those achieved by the benchmark index, such as the S&P 500. This strategy involves less research and analysis as well as fewer costs associated with the buying and selling of securities.  

This may mean that the management fees charged are less than those with a different investment strategy. Active management involves the expertise of a fund manager who looks to choose the winning securities in order to achieve the best returns. This strategy involves plenty of research, analysis, and trading, which naturally results in higher costs. These higher costs may then be passed on to you, the investor.   

Data from the SPIVA Scorecards suggests index tracking outperforms active management most of the time. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively-managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending 31 December 2024.  

10X makes use of an index tracking investment strategy to keep costs low while also taking a more active approach to asset allocation. We take the long-term view with our investment approach, always focusing on trying to get the returns that our clients deserve. To find out more about our investment strategy and how we are able to keep fees on the lower side of the spectrum, click here.  

Asset allocation and TFSA growth 

You should always consider and review the asset allocation of your TFSA. This can be an important tool in the potential growth of your TFSA, and it may also help mitigate the effects of fees. The asset allocation of an investment is the underlying mix of equities, bonds, real estate and cash in which your funds are invested. At 10X, you have the freedom to customise your underlying portfolio by choosing from a selection of carefully curated investment funds. The funds allow you to diversify across the asset classes.  

You select the investment fund according to your risk profile and timelines. Each of the different asset classes has different characteristics. Equities are more volatile, but they may generate higher returns compared to bonds, which add stability to a portfolio but may generate lower returns.  

For example, we can see that equities have historically produced returns above inflation by around 7% annually over the long term (based on JSE All Share Index performance versus CPI from 1960-2020); however, past performance does not guarantee future results. By including equities in your TFSA asset allocation, you have the potential to generate good returns in the long term, which helps mitigate the effects that fees may have on the growth of your tax-free savings account.  

It is also important to consider diversifying your portfolio across the different asset classes. This gives you the opportunity to gain from good returns in certain asset classes while also mitigating against any losses in other asset classes. The same may be said for diversifying offshore. This may help you hedge against any local market instability and potential depreciation of the Rand. You can invest 100% of your 10X TFSA offshore. This may appeal to any investors who already have an investment portfolio heavily invested in the local market.  

At 10X, we offer a range of specially designed funds, each with a different asset allocation and geared towards different investor profiles and time horizons. Within the tax-free savings account, you will find a range of different funds, and there is sure to be a fund that suits your financial situation and goals. To find out more about the funds that we have on offer, follow this link.  

How to protect your TFSA growth from fees 

In order to help protect your tax-free savings account from the effects of fees, you may want to consider choosing a service provider that charges low and transparent fees. Using a provider who is transparent with their fees will allow you to see exactly what you are being charged for with your TFSA. You should be able to view your TFSA’s EAC on your statement. Otherwise, you may request this EAC from your service provider.  

Consider opting for a provider that uses an index tracking investment strategy, such as 10X, where lower fees allow you to have more returns available to potentially grow and compound over time. Avoiding the use of an investment manager or advisor can save you money on advisor fees. You should also review your TFSA annually and make any adjustments to meet your changing financial and lifestyle needs.   

TFSAs and fees: Conclusion 

A tax-free savings account is a powerful investment product that looks to maximise the growth of your funds by allowing for tax-free returns. This means that more of your returns are available to be invested, and they can then potentially grow and compound over the long term. This growth, however, can be impacted by the effects of hidden fees or high fees that may have the effect of reducing the available returns that you have to reinvest.  

As an investor, you are encouraged to review your fees to ensure you are aware of where your money is going. By minimising fees as far as possible, you are optimising the growth potential of your tax-free savings account. 

If you’re looking to open a tax-free savings account or just need some more information, don’t hesitate to get in touch with the helpful investment consultants at 10X. Our superior track record of low cost and inflation-beating returns allows you to retain tax advantages and grow your savings while maintaining full control.