Should You Have a Retirement Annuity? The Case For and Against

What is a retirement annuity?

A retirement annuity is a retirement savings vehicle. You contribute money, and it is invested in underlying investments such as shares, bonds, property and cash, depending on the fund you select. Your money grows over time, with tax advantages you cannot get in the same form when you invest outside a retirement fund.

An RA is not itself an investment strategy. Two people can both have RAs but hold very different portfolios, with different asset allocations, costs and risk profiles. An RA that is not tailored to your individual needs, risk profile and objectives can be a poor choice, even though the structure itself has advantages. Equally, one investor’s disappointing experience with a particular RA does not mean every RA will produce the same outcome.

The case for retirement annuities

The tax deduction can make a meaningful difference

Qualifying retirement fund contributions can reduce your taxable income. For the 2026/27 tax year, contributions to pension, provident and retirement annuity funds are deductible up to the lesser of:

• 27.5% of the greater of your qualifying remuneration or taxable income; and
• R430,000 per year.

These limits apply to your contributions across all retirement funds combined, not to each RA separately. Contributions you cannot deduct in the current year may be carried forward.

Imagine you contribute R1,000 a month. Over a year, that is R12,000 towards retirement. If you qualify for the full deduction and your marginal tax rate is 36%, you could save about R4,320 in income tax. The after-tax cost of those contributions falls to R7,680 for the year, or about R640 a month.

This is an illustration, not a guaranteed refund. If you contribute to a personal RA, your monthly payslip tax doesn’t change. Instead, the deduction is applied when your tax return is assessed, and the saving of about R4,320 is paid as a lump sum refund or reduces what you owe. The R640 a month is the effective cost of your contribution after that saving, not money you receive each month. If your RA contributions go through your employer’s payroll, the saving may instead be reflected in your monthly tax.

The actual saving depends on your taxable income, your marginal rate and your available deduction capacity. The higher your marginal rate, the more valuable the deduction. But it is not free money. How your benefits are taxed later also matters.

Your investments grow without tax inside the fund

Investment growth inside a retirement fund is generally exempt from income tax, dividends tax and capital gains tax. Outside a retirement fund, interest, dividends and realised capital gains may all be taxed. Inside the RA, more of your returns stay invested and compound.

Over a 30-year horizon, avoiding that tax can make a meaningful difference. It does not guarantee a higher return than investing elsewhere. The outcome still depends on investment performance, fees, how much you contribute and how your benefits are taxed at the end.

It encourages you to save

An RA is designed for retirement rather than short-term spending. For some people that restriction is frustrating. For others it is useful discipline. It is easy to withdraw from an accessible investment when a holiday or a new car becomes tempting. Money in an RA is much harder to reach before retirement, which protects it from things that are not part of the plan.

It complements your existing retirement savings

An RA can sit alongside a workplace pension or provident fund. This is useful if your employer’s contributions will not meet your retirement goals, or if you are self-employed and need to make your own provision. Remember that your workplace contributions count towards the same deduction limit, so an extra RA contribution does not automatically earn a full additional deduction.

The case against retirement annuities

Your money is not freely accessible

This is viewed as the most significant disadvantage. You generally cannot access the full value of an RA until retirement, ordinarily from age 55. If you lose your job, face an emergency or want a property deposit, you cannot simply withdraw the balance as you would from an ordinary investment account.

The two-pot retirement system, in place since 1 September 2024, added some flexibility. Generally, one-third of new contributions goes into a savings component, and two-thirds into a retirement component. The savings component allows one withdrawal per tax year, subject to a minimum of R2,000 and the available balance. Withdrawals are taxed at your marginal rate and reduce the money left to support you later.

Crucially, the two-pot system does not make your RA freely accessible. The retirement component stays preserved until retirement. If you have no emergency fund, have expensive short-term debt, or expect to need a large sum before retirement, putting every spare rand into an RA may not be a necessary priority at that stage.

Tax is deferred, not eliminated

When you retire, you can generally take up to one-third of your retirement interest as a cash lump sum. The rest must ordinarily be used to buy an annuity that pays you an income. Lump sums are taxed under the retirement lump-sum tables, and annuity income is taxed at the income tax rates that apply when you receive it.

That means the upfront deduction does not make the money tax-free. Tax is due on what the money has grown to, at the rates that apply to you then.

So whether an RA works in your favour depends mainly on how your tax rate in retirement compares with your rate today. Someone earning a high salary who receives a valuable deduction may benefit considerably. Someone with little taxable income receives far less from the deduction. That does not make an RA unsuitable for the second investor, because tax-free growth and disciplined saving still have value. It does mean the decision should be judged in context and not on the deduction alone.

Regulation 28 limits investment flexibility

Regulation 28 of the Pension Funds Act limits how much a retirement fund may hold in particular asset classes. The limits most investors are constrained by are a maximum of 75% of the fund’s portfolio in equities (local and foreign), a maximum of 25% in property and a maximum of 45% offshore. These rules reduce the risk of retirement savings being concentrated in one type of investment, but they also limit the strategies available inside an RA. An investor who wants a higher equity allocation, or more offshore exposure than the limits allow, may prefer a discretionary account for that portion of their wealth.

The restrictions do not mean an RA must produce poor returns. A diversified, well-managed portfolio within the limits can still be an effective long-term investment. Its suitability depends on your objectives, risk tolerance and wider portfolio.

Our model portfolios are an example. All of them are Regulation 28 compliant, and each has a return objective set above inflation. The Growth strategy aims for CPI + 7% (CPI is a measure of inflation), so if inflation is 4% it is aiming for roughly 11% a year. The Medium and Income strategies aim for CPI + 5% and CPI + 3%. You can see how each is tracking against its target over the last five years on our Portfolio Performance page, including the periods where we have fallen short.

These are long-term objectives. Over a single year or quarter, returns can sit well above or below the target, and past performance is not a guide to future returns.

Fees can reduce your returns

Not all RAs are equal. Some offer competitive fees and a broad choice of suitable funds. Others carry higher administration charges, fund management fees, advice fees or contractual restrictions. A tax deduction cannot compensate indefinitely for an unnecessarily expensive product. Look at the total cost of ownership, including platform charges, underlying fund costs, adviser fees, any performance fees and penalties for stopping or transferring.

But the fee alone does not tell you what you will end up with. Look at the real return after all fees. Invest R100,000 for 20 years in three hypothetical funds:

• Fund A returns 9% a year after fees and grows to about R560,000.
• Fund B costs more than Fund A but returns 9.5% a year after fees and grows to about R614,000, around R54,000 more than Fund A.
• Fund C also costs more than Fund A, but returns only 8.5% a year after fees and grows to about R511,000, around R49,000 less than Fund A.

Higher fees do not guarantee higher returns, and past performance is not a guide to the future. A fund that costs more can leave you better off or worse off. Compare funds on what they put in your pocket after all costs, over a meaningful period.

You may need to prioritise other goals

Retirement is not your only goal. You may need an emergency fund, a home deposit, money to start a business, or education savings you can reach before retirement. An RA is not designed for those. If you have high-interest debt, no emergency savings and limited disposable income, a large retirement contribution can leave you vulnerable in the short term. The right decision is not always to maximise retirement contributions first. It is to balance immediate financial resilience with long-term wealth creation.

What does this look like over 30 years?

Let’s compare investing R1,000 a month for 30 years in an RA and in a discretionary investment. Assume 9% growth a year (compounded monthly) and a 36% marginal tax rate, both now and in retirement. Both options grow to about R1.83 million before tax, from R360,000 contributed.

Scenario	After-tax value at retirement
RA, tax saving invested	About R1.75 million
Discretionary investment	About R1.62 million
RA, tax saving spent	About R1.17 million, plus R360 a month spent along the way

The RA only comes out ahead if the tax saving is actually invested. Your R1,000 monthly contribution earns a tax saving of about R360 a month. Invested in a discretionary account, that saving grows to roughly R583,000 after tax. Added to the RA’s after-tax value of about R1.17 million, you finish about R136,000 ahead of the discretionary route. The advantage comes from tax-free growth inside the fund and from the saving being put to work.

If you spend the tax saving, the picture reverses. You finish with about R1.17 million, roughly R447,000 behind the discretionary route, because the RA balance is taxed when you retire and the saving was never invested. In return, you have R360 a month, about R130,000 over 30 years, to use today.

One more point on the table: it compares values, not what you can take as cash. At retirement you can take up to one-third of an RA as a lump sum, and the rest must buy an income.

Spending the tax saving is not money lost. It is a choice. If it pays for a family holiday, or goes towards a deposit on a home, you have gained experiences and assets that matter to you now. The right balance depends on your goals, and finding it is a big part of what financial planning is about.

What about a tax-free savings account instead?

A tax-free savings account (TFSA) is often compared with an RA because both offer tax-efficient growth. They work differently. A TFSA gives no upfront deduction. Instead, growth, interest and dividends inside the account are tax-free, and so are withdrawals. It is also accessible, so it suits investors who want flexibility without locking their money away until retirement.

For the 2026/27 tax year, the annual contribution limit is R46,000 and the lifetime limit is R500,000. Exceeding the limits results in a tax penalty of 40% on the excess amount. Withdrawals do not restore your lifetime limit, so treat the TFSA as a long-term account even though it is accessible. You can check the current rules on SARS’s tax-free investment page.

An RA and a TFSA serve different purposes. One is not a substitute for the other, and the right balance depends on your retirement goals, tax position, need for access and available contribution capacity.

What about investing outside an RA?

Discretionary investments, such as ordinary unit trusts, ETFs or direct share portfolios held outside a retirement fund, are flexible. There is no requirement to stay invested until retirement, you can access the money when you need it, and Regulation 28 does not restrict your asset allocation or offshore exposure in the same way.

The trade-off is that returns may be taxed, whether as tax on interest, dividends, foreign investment income or realised capital gains. Discretionary investments suit medium-term goals and money you may need before retirement. Because the money is accessible, they also require discipline to make sure it is not spent before it serves its purpose.

You do not have to choose between an RA and discretionary investments. Each can play a different role in the same financial plan.

Who should consider an RA?

An RA is worth considering if you:

• Pay income tax and can benefit from the deduction.
• Need to save more for retirement than your employer’s fund is likely to provide.
• Have a long time horizon and can leave the money invested.
• Want your growth to accumulate in a tax-efficient structure, and would benefit from the discipline.
• Understand the access restrictions and have provided for short-term needs.

It may be worth limiting or delaying contributions if you have expensive debt, no emergency savings, large short-term commitments or a strong need for accessible capital. You may also want to direct some money to your TFSA allowance or to discretionary investments alongside your retirement savings. These are not mutually exclusive, and you can increase your RA contributions as your income and position improve.

For example, one investor may prioritise an RA because they earn a high salary, have enough accessible savings and need to build retirement capital. Another may need to pay down debt and build an emergency fund first, then gradually increase contributions. A third may combine an RA with a TFSA and discretionary investments, for a mix of tax-efficient retirement savings and accessible wealth. The right combination is not the same for everyone, and it should be based on your income, tax position, existing retirement benefits, time horizon, need for accessible capital and the retirement income you want.

The bottom line

RAs have genuine disadvantages: your money is less accessible, investment choices are restricted, fees matter, and your benefits are taxed later. They also have real advantages: potentially substantial tax relief, tax-free growth and a structure that preserves your savings for retirement.