While the long-term benefits of investing through a retirement annuity should not be underestimated, there’s a lot more to this retirement funding vehicle that investors should be aware of. In this article, we explore the many benefits of a retirement annuity (RA) and how to maximise these benefits in your investment portfolio.
Understanding the basics of an RA
While employer-sponsored pensions and provident funds remain the default retirement vehicles for many South Africans, a retirement annuity (RA) is a powerful individual investment option with distinct advantages. Available to anyone earning taxable income, a Registered Account (RA) offers a structured and tax-efficient way to save for retirement. It is particularly well-suited to the self-employed, contract workers, or those without access to a workplace fund.
Investors can contribute up to 27.5% of their taxable income annually (capped at R350,000) to an approved retirement fund—including an RA—and claim the contribution as a tax deduction. In addition, the underlying investments benefit from being exempt from tax on interest, dividends, and capital gains, making the RA structure one of the most tax-effective investment vehicles available.
Building a tailored investment strategy
Retirement annuities are typically housed on linked investment service provider (LISP) platforms, offering access to a wide range of unit trust funds. Investors can structure their portfolio in line with their goals, risk tolerance, and investment horizon. That said, investment choices are subject to Regulation 28 of the Pension Funds Act, which limits exposure to certain asset classes to reduce concentration risk. While these limitations may constrain aggressive growth strategies, the long-term tax advantages of an RA often outweigh the short-term impact of asset allocation restrictions.
Flexible contributions for changing circumstances
One of the key advantages of a modern RA is its contribution to flexibility. Investors can choose to contribute monthly, quarterly, annually, or make ad hoc lump-sum payments when cash flow allows—particularly useful when planning around tax season. Importantly, you can pause or reduce contributions without penalty should your financial situation change. This flexibility makes an RA a versatile long-term savings tool, particularly for those with fluctuating income.
Planning for retirement withdrawal
Legislation allows you to retire from your RA at age 55, subject to the rules of each scheme. At retirement, you may withdraw up to one-third of the RA’s value as a lump sum, with the first R550,000 being tax-free (assuming no prior lump-sum withdrawals from other retirement funds). The remaining two-thirds must be used to purchase an annuity income—either a life annuity, a living annuity, or a combination of the two. There is no maximum age by which you must retire from your RA, but decisions should be made strategically and with tax implications in mind.
How RAs fit into your estate plan
Funds held in a retirement annuity do not form part of your deceased estate, nor do they attract estate duty—provided contributions were made on a tax-deductible basis. However, RAs are governed by Section 37C of the Pension Funds Act, which mandates that death benefits be distributed to those who were financially dependent on you, either fully or partially, at the time of death. It’s also worth noting that RA proceeds are protected from creditors, with the exception of outstanding Sars liabilities and maintenance claims.
Transferring your RA without penalties
If you hold an RA on a LISP platform and are dissatisfied with the product, service, or fees, you may transfer it to another provider without penalty, using a Section 14 transfer. The process can take several weeks to finalise, but enables you to seek better value or consolidate investments. While the law permits multiple retirement annuities, keep in mind that contributions to all RAs are aggregated for tax deduction purposes. Also, bear in mind that having several RAs can complicate administration, so think carefully before taking out too many retirement annuities.
Understanding fees and transparency
Not all RAs are created equal, especially when it comes to cost. The impact of fees on long-term investment performance can be significant, and hidden costs can quietly erode your returns over time. Always scrutinise the platform, advice, administration, and asset management fees associated with your RA. Transparent reporting and access to low-cost investment options are essential.
A retirement annuity remains one of the most accessible and tax-efficient ways for South Africans to build long-term financial security. Its flexible contribution structure, investment customisation, and estate planning benefits make it a compelling addition to any retirement strategy. That said, maximising the value of your RA requires ongoing engagement—reviewing fees, assessing performance, and adjusting contributions in line with your changing circumstances. With professional guidance and regular reviews, your RA can be a cornerstone of a well-structured investment portfolio.
* Tapfuma is a Certified Financial Planner professional at Crue Invest.
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