Tax-free savings account vs unit trust: What’s the difference?

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South Africans often assume that a tax-free savings account and a regular unit trust are essentially the same kind of investment. While they may appear similar at first glance, there are a couple of key differences that you should be clear on as an investor.

These differences may impact how you use these vehicles, allowing you to make better and more efficient investment decisions in the long term. In this article, we will explore both tax-free savings accounts and unit trusts in more detail to help you understand the main differences between these two products and when you may consider using each of these vehicles.

What is a tax-free savings account?

A tax-free savings account (TFSA) is a long-term investment product that was introduced by the National Treasury in South Africa in 2015. A tax-free savings account is not like a savings account in the regular sense; it is an investment account with the potential for exceptional long-term growth. The rationale behind introducing the tax-free savings account was to encourage South Africans to save more.

Within the tax-free savings account “wrapper”, you have access to a range of different funds, as would be the case with a unit trust. A TFSA operates in a similar way to a unit trust, but TFSAs allow you to save money without the need to pay any tax. You will not need to pay any capital gains tax, interest tax or dividends withholding tax, and you won't be taxed on the income you draw from the investment. This allows for more returns to be reinvested and potentially compounded over time.

However, there are limits in place when it comes to the contributions that you are able to make. You are able to contribute R48,000 per annum (since 1 March 2026) and R500,000 per lifetime. Any contributions that are over and above this limit are subject to penalties of 40%. These penalties will be levied on any portion that is over and above the limit.

What is a unit trust?

A unit trust is a ‘pooled investment’ that is managed by a fund manager, allowing you access to financial products that may not have otherwise been the case for a direct investor, who may have a potentially smaller amount to invest. Your money is combined with that of other investors and is invested in a mix of asset classes such as equities, real estate, bonds and cash.

By pooling money, unit trusts give investors access to a diversified portfolio that might be difficult to build individually, especially with smaller investment amounts. When you invest, you buy units in the fund, and the number of units you receive depends on the unit price and how much you want to invest.

Unlike a TFSA, the returns generated in a unit trust may be subject to tax. This can include income tax on interest, dividends tax and capital gains tax when you sell your investment.

There are no limits on how much you can invest in a unit trust. Some service providers may, however, set minimum investment amounts, so always check these before investing.

Tax treatment differences

One of the most important distinctions between a unit trust and a tax-free savings account is how your investment returns are taxed. Let’s take a look.

Understanding unit trust tax

Returns may be subject to different taxes, including capital gains tax, dividends tax and interest tax. Currently, as of 20 March 2026, interest earned is taxed at your marginal income tax rates, with the first R23,800 being exempt for those under 65, and the first R34,500 for those older than 65.

The dividend withholding tax rate is 20%. Investment withdrawals from your unit trust can result in a capital gain, which may then result in the investor needing to pay capital gains tax. Since 1 March 2026, the first R50,000 of capital gains per year is exempt. 40% of the balance will be included in your taxable income and taxed as per the marginal income tax rates. The maximum effective tax rate that can be applied to your capital gain is 18% at present.

TFSA tax advantage

A tax-free savings account comes with significant tax advantages. As mentioned, there is no capital gains tax, no dividends tax and no interest tax. Additionally, there is no tax applied to withdrawals, a major advantage for investors saving for retirement.

Contribution limits and flexibility

Another key difference between a unit trust and a tax-free savings account (TFSA) is how much you can invest and how flexible each option is. Understanding these limits can help you plan your contributions more effectively over time.

Unit Trust: A unit trust does not have any contribution caps; there is no annual cap or lifetime cap. There are also no restrictions or penalties on withdrawals, and you may withdraw capital at any time. As discussed above, you will need to be clear on the minimums that you are required to invest, and these may vary according to the service provider.

TFSA: As mentioned, a TFSA has an annual contribution limit of R48,000 and a lifetime contribution limit of R500,000. These are the current regulations as of 20 March 2026. There are also no restrictions on withdrawals from your TFSA. TFSAs are seen as long-term investments, so ideally, you should keep your savings invested and avoid withdrawals, if possible. Once you have withdrawn capital, you are unable to add the money back, as this contribution room has now been used up.

Understanding asset allocation in a tax-free savings account and a unit trust account

A TFSA is considered a long-term investment product, so when structuring your asset allocation, keep this in mind. You would also consider your risk profile; how comfortable you are with market volatility in the short term, as well as your investment timelines and long-term financial goals. The idea is to then align your asset allocation with this. You would select a mix of the different asset classes: equities, bonds, real estate and cash.

Equities may produce the best returns in the long term, although they can be the most volatile of the asset classes. As data suggests, 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). Of course, past performance doesn’t guarantee future results. Bonds may produce some lower returns, but will also add some stability to your portfolio. While bonds are seen as a more conservative option, it does not mean they will never outperform expectations. Real estate is a good hedge against inflation, while cash is likely to produce the lowest returns of all the asset classes, but it is the most liquid and stable.

Similarly, with a unit trust, you would also consider your investor profile. This means looking at your risk profile and your investment timelines, as well as your long-term financial goals. Again, you would select your asset allocation from the range of different funds. A well-diversified portfolio that includes a mix of different asset classes can be a good way to balance both your risk and reward.

At 10X, we offer a variety of different funds which cater to a range of different investor profiles. You are also able to invest your TFSA 100% offshore, should you wish. Offshore exposure can offer more opportunities to the investor as well as to provide a hedge against local market volatility and any depreciation of the rand that may occur. Please visit our funds page for the most up-to-date fund information. Feel free to try out this useful TFSA calculator when doing your calculations, part of our suite of free online resources for investors.

Why fees matter in a TFSA and unit trust

High fees can have the effect of reducing the available returns you have to invest in both a TFSA and a unit trust. You would, therefore, look to carefully manage fees and ensure that these are minimised where possible. This would then potentially allow for more of your returns to be reinvested and allow for potential growth of your investment over the long term. Here are some of the fees which you may see deducted from your TFSA and unit trust:

• Advisor fees: If you are making use of an advisor, they will charge fees for their advice and any other services that they offer. There could be both an initial and an ongoing fee charged.
• Management fees: These are the fees charged for the management and running of the fund.
• Administration fees: There will be administration fees applied. These will be for tasks such as reporting, compliance and similar.

Let’s look at an example of 1% in fees vs 3% in fees while making use of a TFSA. We will assume the following information:

• Monthly contribution: R3,000
• TFSA lifetime limit: R500,000
• Investment term: 30 years
• Annual return: 12%
• Annual inflation: 6%

The contributions will stop after reaching the limit, but the money will stay invested for the full 30 years. The returns are compounded monthly and adjusted for inflation to determine the final investment values.

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

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

As this example shows, a small difference in fees can have a significant impact on your TFSA’s final investment value. This example is for illustrative purposes only, and actual results may vary. Learn more about the impact of fees here.

When it comes to fees, you would also want to check the Effective Annual Cost (EAC) of both your TFSA and your unit trust. This is a standardised metric that allows you to compare and evaluate the fees that are charged by different service providers. All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more returns may be reinvested and allowed to potentially grow over the long term.

The EAC of an investment should just be one factor to keep in mind when comparing different service providers. You may also like to make use of this EAC calculator provided by 10X as a part of our free online suite of tools. This is a great tool to use when comparing providers.

At 10X, we focus on keeping fees low, simple and transparent for our investors, allowing for more of your returns to be reinvested and potentially grow over time. Please explore our products for the most up-to-date and product-specific information.

The value of index-based investing

An index-based investment strategy, which can also be called a passive investment strategy, is when a benchmark index, like the S&P 500, is mimicked, with the goal of generating the same returns as this index. This strategy may also allow for lower costs as it makes use of fewer activities, which may mean potentially lower costs for the investor. This approach focuses on stability and reliable long-term results.

An active investment strategy involves more activity, as you typically have a manager chasing the best stocks. This would involve plenty of research, analysis and buying and selling. These higher costs may then result in higher fees for the investor. This approach, however, may not always deliver the best results.

The S&P Indices Versus Active (SPIVA) Scorecards track the performance of actively managed funds against their benchmarks globally. According to the latest SPIVA South Africa Scorecard (as of June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending June 30, 2025.

At 10X, we use an index-based investment strategy alongside a more active approach to asset allocation, allowing us to keep fees lower, meaning that more of your returns can be reinvested and potentially grow in the long term.

When should you choose a TFSA vs a discretionary unit trust?

Both a tax-free savings account (TFSA) and a discretionary unit trust can play an important role in your investment strategy. Instead of choosing one over the other, you should understand what is most appropriate based on your goals, time horizon and tax position.

A TFSA might work best for you if:

• You are investing for the long term and want to maximise tax-free growth.
• You have not yet reached your annual or lifetime contribution limits.
• You want to benefit from potential compounding returns without paying tax on interest, dividends or capital gains.
• You are comfortable keeping your investment largely untouched to make the most of the available tax benefits.

A unit trust may be better suited for you if:

• You have already used up your TFSA contribution limits.
• You want flexibility to invest larger amounts without any contribution caps.
• You may need access to your money in the short to medium term.
• You are building additional investments outside of a TFSA as part of a broader portfolio.

In practice, many investors use both: a TFSA for tax-efficient, long-term growth and a unit trust for additional investing and flexibility. The idea is to use each product strategically in line with your financial goals and the stage of life you’re at.

TSFAs vs unit trusts: It’s not either/or

When it comes to deciding whether a TFSA or unit trust is best suited for you, it’s important to remember that it doesn’t need to be one or the other. You can make use of both in a strategic manner in order to have the most efficient long-term outcomes while paying close attention to your asset allocation and fees. If you have any queries surrounding tax-free savings accounts or unit trusts, get in touch with the helpful and experienced investment consultants at 10X, who are just one call away. Secure your future with 10X today!