The Wealth Room


Making tax work for you for retirement

Now that we have been through the foundations of investing, through understanding how important asset classes and asset allocation is in setting up the right Unit Trust that will best suit you. We can now move our attention onto retirement investing and what options are available for us all to invest into regarding this.

Before I start, I want to just point out that many people start investing or planning for this process without an end goal in mind, and I find this to be counterproductive. The reason being, is if you don’t know how much money you need every month during retirement, how do you know how much money you need to save every month towards retirement. So the first thing I would like to point out in this post is, before you read any more investment advice, first determine in your own mind, how much you feel is a good value for you to live off every month at retirement. Once you have that figure, contact a CERTIFIED FINANCIAL PLANNER® and ask him to put an investment strategy in place for retirement and revisit that strategy every year to see if you’re on track to achieve that goal, if you feel that you’re out of your depths. The reason why I like to look at investing or retirement from this perspective, is that it puts you in control of your retirement future, with clearly defined goals and a road map on how to get there.

Remember that no figure is the right or wrong figure, we all just have different goals in life, and are all content with different financial security. The main question that you really need to ask yourself, is what you’re doing today, is it getting you closer to where you want to be tomorrow?

In my experience, having an end goal in place lets you understand what you need to work towards and by having that understanding you can equip yourself much better for that journey and finish strong, instead of never getting to the finish line.

When it comes to retirement investing there are three main ways to save for retirement that have a huge tax advantage.

The first option is if you’re self-employed and you have to look after your own retirement investing or funding. What we will use in this case is what we call a RETIREMENT ANNUITY or more commonly known as a RA, yes I am sure you have all heard of this investment vehicle before, but let’s chat about it in a little more detail. A retirement annuity (RA) is a savings vehicle that the government has encouraged specifically for saving for retirement. With a RA you place your money in an UNIT TRUST (see Unit Trust Article if you’re not sure what a unit trust is) with an asset manager. The only restriction that you really have regarding selecting a fund is Regulation 28 of the Pensions Fund Act. In layman’s terms, that simply means that your fund that you select for the RA can’t have more than 75% Equity exposure (see the article on Asset Allocation, if this is not making any sense).

Why would the government want to do that? Well what the government is trying to avoid, is investors investing in funds that are high in risk and want more diversification within inventors investments, regarding their retirement funding to prevent the risk of investors losing their funds and relying on the government for a state pension. This in essence is not totally a bad thing, in my opinion.


The advantages of a RA:

1.     You can put up to 15% of your taxable income into the RA and it is tax deductible. This is a huge advantage, and I will show you below in an example shortly.

2.     The Capital Gains in a RA are not taxed, so a RA has a huge tax advantage all around.

3.     At retirement your proceeds are also taxed favorably by applying retirement and withdrawal tables rather than income tax rates.


The disadvantages of a RA:

1.     You may not make any withdraws from this fund until retirement.

2.     You will only have access to the funds at the earliest age of 55 or depending what retirement age you select.

3.     At retirement age, one third of the value can be taken as a lump sum and you can do as you please with the funds (but please reinvest the funds or pay off any debt you might have and don’t blow the funds), while the rest must be invested into a living or a life annuity (living annuity is the more popular option) to get a monthly income from during retirement. In many people’s minds they find this to be a negative, however I think it is a great idea, as it prevents us from spending the funds straight away.

The second and third option is for employees. It is offered by an Employer who provides Pension or Provident Funds as part of the monthly package. The pension and provident fund are very similar to a RA, in regards to the advantages and disadvantages, with a few small changes. The main difference between the Pension and Provident fund is that the employer normally contributes a percentage of the 15% tax free portion that you’re allowed to contribute towards retirement funding and you would need to contribute a percentage towards it too.


The main differences between Pension and Provident fund:

1.     With a Pension fund Both the employer and employee contributions are (subjected to limitations of 15% of your taxable income) deductible for tax purposes, whereas with a Provident fund only contributions by the employer are deductible.

2.     The main difference is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life just like a RA. A provident fund member can get the full benefit paid in a cash lump sum and can do as they please with the lump sum.

Most employers who have set a pension or provident fund up for their employees will have Financial Planners that you can consult with, to make sure you get the most out of the benefits and understanding the underlying fund that you can select to invest into.

So let’s look at an example below and how this can impact your savings for retirement.

Lets take John and Jane and let’s assume that they are self–employed and their taxable income for 2014/2015 is R 430 000 p.a.

Jane contributes R 60 000 pa or R 5 000 pm to her Retirement Annuity during the tax year. (Full 15% allowance = R 64 500) and John decides “NOT” to contribute to an R.A. and invests the money himself.


Tax on John and Jane’s investment will look as follows:




Gross income

R 430 000

R 430 000

RA contribution



Taxable income

R 430 000

R 370 000

Marginal tax rate



Tax as per Tables

R 105 774

R 77 147 = (R 28 627 savings for the year in taxes)

So as you can see from the example above that Jane’s RA contribution, has not just saved her money towards retirement, it has also dropped her into a lower tax bracket, meaning that she will pay less tax at the end of the day.

John has paid R 28 627 more tax than Jane for the year, but more importantly Jane has in the process also saved R 60 000 towards her Retirement. So what Jane has really done is saved herself R84 300 for the year (R60 000 savings and R28 627 tax) and John has cost himself R28 627 for the year in taxes for not taking advantage of the RA investment vehicle.

On top of that any investment that John makes is with after tax money; therefore any interest he earns in excess of R23 000 – R35 000pa (depending on your age) will be taxed at 35%. Any interest Jane earns within her RA will be taxed at a much lower rate (+-9%) and no Capital Gains Tax (CGT) is payable within the RA, whereas John will be required to pay CGT on the disposal/maturity of his investment/s.

Effectively what it comes down to is that the Government is giving us a huge incentive to save for Retirement in a RA, Pension or Provident Fund, so we must take advantage of the investment vehicle, as it is for our benefit.

Wouldn’t you like to be like Jane and have SARS contribute towards your retirement too?

After having a look at the above, what is your view on a RA, Pension or Provident fund now?

I must just add that even if you have jumped in at an early age and have really taken full advantage of the Retirement investing space, you will still need to be smart with your hard earned income and set up other investments to meet your current standard of living at retirement.

We need to keep in mind that if we are only putting away a certain percentage of our income every month and are living on the other bigger portion, how on earth are we going to reverse the roles at retirement. I mean, imagine living on 15% of your income today, it would not be possible, so what makes us think it will be any different at retirement?

I Hope this article has helped build your confidence around the retirement investing space!


 If you liked this article you will also like the following articles:

Compound interest
Time value and money
Effects of inflation
Selecting the right Unit Trust for you



September 29, 2014


Grant van Zyl

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