Are South Africans confusing general savings with retirement investments? If so, you are missing out on tax breaks and long-term growth offered by retirement annuities.

Many South Africans may not be differentiating between investing towards retirement versus saving for other goals. This has the potential to undermine their long-term financial security.

According to an internal study by a major South African financial services company, clients who invest in general investment products (see post on Discretionary Investments) are significantly less likely to purchase retirement annuities (RAs). (See post on Retirement Based Investments.)

It isn’t very clear why this is the case, but it is possible they may be trying to invest for their retirement using other investment structures, and this may not be very efficient. It is important to note that while investing for goals such as your children’s tertiary education differs significantly from investing for retirement, they both involve planning and discipline but require a different approach in terms of

time horizon, risk tolerance, and the overall investment strategy and investment solutions.

Investing for your short- to medium-term goals, such as buying a home or funding your children’s education, entails thinking about the investment solutions that will allow you to meet your desired investment goals within the time limit that you have to achieve the goal. It may also require one to be able to easily access the fund when the time comes.

Additionally, one might want to think about an investment solution that can preserve your capital and give moderate growth.

This calls for a longer-term view, because ultimately the timeline allows for investors to ride out market ups and downs, focus on inflation protection, and enjoy the power of compound interest over decades. RAs are specifically designed to meet these needs.

The investment solutions for each of these scenarios needs to perform differently to give the most effective desired outcome. This is why people need to think differently about investing for their short- and medium-term goals as against investing for their retirement. 

Why are Retirement Annuities unique?

Some clients may be concerned that they cannot withdraw easily from their retirement funds. However, the three-pot system has introduced new reforms (see post on the Three Pot System).  A third or all your contributions made after 1 September 2024 will be automatically placed into a ‘savings pot’ which can be

accessed once a year. But the biggest advantage that many do not always realise with retirement investments is that they can potentially provide significant tax savings.

Remember, money that is put in a retirement fund, such as a retirement annuity, that is deducted from your earnings lowers your overall tax burden. Contributions up to 27.5% of your earnings can be deducted, subject to an annual deduction cap of R350 000. For example, if you earn R40 000 a month, and put R6 000 into a retirement annuity, you only pay tax on the remaining R34 000.

But most importantly is that the growth on the savings in your retirement annuity is not taxed, unlike normal discretionary investments. There is no tax on capital growth, dividends, or interest income in the RA, which can have a significant positive impact in growing your retirement savings. You will only pay tax when the benefits are paid to you from your RA after your retirement.

When considering the advantages of certain investments over retirement savings, people really need to consider these benefits in the long term. The monthly tax savings alone represent a substantial financial advantage.

It’s really worthwhile for anyone saving towards retirement to get familiar with how a retirement annuity can benefit them. They have been proven to work well in

the long run. They still remain the cornerstone of intelligent and holistic retirement planning.