As independent financial advisors, we’ve come to learn that while most people know they should be contributing to a retirement fund, very few understand the complexities, opportunities, and limitations that come with these investment vehicles. Highly tax-efficient and tightly regulated, retirement funds form a critical part of many South Africans’ long-term wealth strategies—but navigating the fine print can be daunting. Based on years of client interactions, here are the most important things we wish every investor knew about their retirement funds.
Retirement funds come with a legal rulebook
Many investors are surprised to learn just how tightly regulated retirement funds are. Whether you’re investing in a pension, provident, preservation, or retirement annuity fund, your savings fall under the jurisdiction of the Pension Funds Act. Insurance-based RAs, meanwhile, are regulated by the Long-Term Insurance Act. Overlaying this are several other laws, including the Income Tax Act, Divorce Act, Maintenance Act, and FAIS Act—each playing a role in how your funds are taxed, accessed, or divided. It’s a complex legal environment, and understanding how the legislation fits together is essential to making informed decisions.
There’s a difference between company funds and personal ones
Retirement savings are typically channelled into either an occupational fund (offered by your employer) or an individual retirement annuity (RA). Occupational funds include pension and provident funds, which can be structured to suit different categories of employees. These are often compulsory for eligible employees and receive contributions from both employer and employee.
If you’re not part of such a scheme—or you want to invest over and above your group retirement savings—you can do so via a personal RA. Since March 2021, retirement rules have been harmonised across pension, provident, and RA funds. This means that, for contributions made after this date, you can take one-third as a lump sum and must use the remaining two-thirds to buy an annuity. However, vested rights apply to provident fund members over 55 at the time of the change, preserving their previous withdrawal options.
Your fund has trustees—and they work for you
All registered retirement funds must be overseen by a board of trustees, who are legally obligated to act in the best interest of members. Trustees are responsible for ensuring that contributions are received, fund rules are followed, and investments are appropriately managed. They’re required to receive ongoing training and to seek expert input where necessary.
While trustees are not personally accountable to individual members in the same way a service provider might be, they do have a fiduciary duty to the fund and its members collectively. If you’re part of an occupational fund, it’s worth finding out who your trustees are and how to access the fund’s communication, performance reports, and governance documents. It’s your money—they’re there to protect it.
Not all retirement annuities are created equal
This is a common area of confusion. Clients often don’t realise that some RAs are structured as insurance policies, while others are housed on LISP platforms in the investor’s name. Unit trust RAs are generally more transparent, flexible, and cost-effective. You can change contributions at any time without penalties, choose your own underlying investments (subject to Regulation 28), and switch funds when needed. By contrast, insurance-based RAs tend to carry legacy commissions, limited investment flexibility, and penalties for non-payment or early termination. Understanding which type of RA you have is essential for long-term planning and cost control.
You can get tax back—but there’s a cap
One of the main attractions of retirement funds is the tax deductibility of contributions. You can contribute up to 27.5% of your taxable income or remuneration (whichever is greater), capped at R350 000 per year. These contributions are tax-deductible and can reduce your tax liability when you file your return.
However, this limit applies across all retirement funds combined. Also, many clients forget to factor in all their income sources—salary, rental income, REIT dividends, and investment returns—when calculating their deductible amount. It’s important to understand that “remuneration” and “taxable income” are defined differently, which can affect your actual deduction.
Yes, you can invest offshore—but with limits
A long-standing frustration for many investors is Regulation 28, which limits the exposure of retirement funds to certain asset classes. As of 2022, the allowable offshore allocation increased from 30% to 45%, and the separate 10% Africa limit fell away. While this still restricts full global diversification, it’s a step forward. This increased flexibility allows retirement investors to hedge against domestic risks—something increasingly important in today’s globalised and volatile economy.
You can’t access your funds just because you want to
One of the biggest misconceptions we see is the belief that you can dip into your retirement fund whenever you need to. In truth, access is generally restricted. In a retirement annuity (RA), you can only retire from age 55 onwards, with limited exceptions such as permanent disability. Pension and provident funds have set retirement ages governed by the employer’s fund rules. Preservation funds offer a one-time withdrawal opportunity before age 55, after which no further withdrawals are permitted until retirement. However, with the introduction of the Two-Pot Retirement System on 1 September 2024, fund members now have limited access to a portion of their retirement savings during their working years. Specifically, members can withdraw from their Savings Component once per tax year, subject to certain minimums and tax implications. Despite this new access mechanism, the majority of one’s retirement savings remain ring-fenced in the Retirement Component to ensure long-term financial security.
Retrenchment has tax implications
When a client is retrenched, they often don’t realise that their severance benefit and any lump sum from their retirement fund are taxed together. As of 1 March 2023, the first R550 000 is tax-free—this applies across both severance and retirement lump sums, and it’s a once-in-a-lifetime benefit. SARS keeps a cumulative record of all such withdrawals, so if you’ve previously accessed retirement or severance benefits, those amounts count toward the R550 000 threshold. Additional withdrawals are taxed on a sliding scale. It’s important to plan carefully to avoid using up this valuable tax concession too early in life.
Divorce doesn’t wait until retirement
Under the Divorce Act, a spouse can claim a share of their partner’s retirement fund at the time of divorce—this is called the pension interest. The definition and calculation of pension interest depend on the fund type. In pension, provident, and preservation funds, it’s calculated as the amount the member would receive if they resigned on the date of divorce. In retirement annuities, it’s the value of all contributions made up to that point plus simple interest at a prescribed rate. Importantly, if the member resigned from the fund before the divorce date, there may be no pension interest to claim, with many divorcing spouses learning this too late.
Your beneficiaries don’t always get the last say
Possibly the most misunderstood aspect of retirement funds is what happens on death. When a member passes away, their retirement fund death benefit is governed by Section 37C of the Pension Funds Act. This section requires trustees to distribute the benefit among financial dependants and nominees in a fair and equitable manner—not necessarily according to the nomination form. That means your nominated beneficiary might not receive the benefit if, for example, you have minor children or financially dependent parents. Because these benefits are paid outside of the estate, they’re not subject to estate duty—but it’s critical to review your nominations regularly and understand the trustees’ discretion.
Retirement funds are powerful tools for wealth creation—but their benefits come with conditions, complexities, and caveats that too often go unnoticed. As advisors, we believe it’s not enough to simply contribute to your fund. It’s important to understand how the rules affect you, plan ahead for the way benefits are taxed and distributed, and structure your retirement strategy with foresight. The earlier you engage with these issues, the more empowered your retirement journey will be.
Have a fantastic day.
Sue
