Optimal saving for retirement

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Optimal saving for retirement


When you are embarking on dedicated saving for retirement in your personal capacity, traditionally, there is only one investment product that you can use: a retirement annuity. If you are clever about it, there is a way to maximise the amount you save – without actually paying more from your bank account.

A retirement annuity (an RA) involves a contract between you (the policyholder), and a long-term insurer (the issuer of the policy). It does not require an employer–employee relationship, as is the case with a pension fund or provident fund. Contractually, you will typically commit to making regular contributions, be it monthly, quarterly, or annually. These premiums are tax-deductible, up to certain limits imposed by the Income Tax Act[1]. If your contributions are in excess of the annual deductible limit, it will be carried forward to the next year, until retirement – into retirement, if need be[2]. Your contributions will be invested in the underlying investment fund(s) of your choice. However, these funds are restricted in the risk exposure that they may have[3]. All growth on the savings will be free of tax[4]. Your savings will be locked in until the minimum age of 55 when you can retire from the policy. On retirement from the policy, you can access a maximum of one-third in cash, subject to taxation[5]. The balance has to be invested in a compulsory annuity, which will provide you with an income for the rest of your life.

A tax-free investment (TFI)[6] is another investment vehicle that also offers the benefit of tax-free growth. The downside to a TFI is that the contributions to a TFI are not tax-deductible. These contributions are also limited, both annually and in your lifetime. Currently the annual limit is R36 000[7]. Some of the benefits of a TFI include the fact that there is no limit imposed on the risk exposure within the investment, that the cost of TFIs are very tightly monitored and legislated, and that you can access the funds at any time, before or after retirement.

To summarise:

Leading up to retirement, a combination of these two products can be very beneficial to maximise the amount available at, and in, retirement.

For some perspective, let’s look at an example:

Joe Soap (30) is self-employed and earns a monthly income of R35 000 from his business. The maximum tax-deductible contribution he can make to a retirement annuity in the current tax year is R115 000. He contributes the full amount and gets the coinciding tax deduction. As a result, his tax payable for the year decreased from R97 648 to R62 698. This equates to a tax saving of R34 950.

Assume Joe will continue to make these contributions annually until retirement at age 65. He increases the amount with 6% annually. The underlying investment portfolio that his contributions are invested in is a moderate risk investment, earning an average return of 10% per annum. At retirement, he would then have saved R64.5 million.

By merely reinvesting the tax refunds of the first 14 years in a TFI (at which time the lifetime limit will be reached) and keeping the funds invested until retirement, Joe will have an extra R14 million at retirement[8]. Joe will have 21% more capital available at retirement, as a result of the reinvestment of the tax refund. Remember, this is not as a result of additional funds being invested from his bank account and impacting on his cash flow, but rather from merely investing the tax refund instead of spending it. It is also not considering the savings in tax that Joe had by investing in tax-free investments.

As an alternative, assume that Joe uses only half of his tax refund to invests into a TFI, and uses the balance toward expenses or to pay off debt. After 28 years, he reaches the lifetime limit, but keeps the funds invested until retirement. At retirement, he will then have R8.5 million, which is still 13% more than he would have had had he not reinvested any of the funds. The difference between the two scenarios here is as a result of the impact of compound interest.

By combining these two products, Joe is optimising the tax-free growth he can get, as well as providing for additional provisions for retirement. By adding the TFI to his retirement portfolio, Joe also has the flexibility and liquidity to access the funds before or in retirement, should there be an emergency or any capital needs – a winning combination overall!


Pietro Odendaal, Head of Department of the School of Financial Planning



[1]  Section 11F of the Income Tax Act, 1962 (Act No. 58 of 1962)

[2]  Section 10C of the Income Tax Act, 1962

[3]  Limitations are imposed by Regulation 28 of the Pension Funds Act, 1956 (Act No. 24 of 1956).

[4]  Section 29A and 29B of the Income Tax Act, 1962

[5]  According to the Second Schedule to the Income Tax Act, 1962

[6]  Section 12T of Income Tax Act, 1962

[7]  Draft rates and monetary amounts, and amendment of Revenue Laws Bill, 27 February 2020.

[8] Assuming an interest rate 2% above that earned in the RA


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09 Jul 2020