As the end of the tax year approaches, there’s no better time to maximise your contributions towards a retirement annuity (RA). Whether you’re self-employed, earning irregular income, or simply looking to boost your retirement savings in a tax-efficient way, understanding how RAs work has never been more important—especially with the introduction of the Two-Pot Retirement System in 2024.
What is a retirement annuity?
A retirement annuity is a regulated investment vehicle designed to help individuals save for retirement in a tax-efficient and disciplined way. Governed by the Pension Funds Act (PFA), RAs are open to any taxpayer wanting to fund for retirement independently or supplement an existing pension or provident fund. Because contributions are tax-deductible and the growth within the fund is tax-free, RAs remain one of the most powerful long-term savings tools available in South Africa.
How do RAs work?
Modern RAs are unit-trust-based investments hosted on LISP platforms, giving investors transparency, flexibility, and a wide range of underlying funds to choose from. Investors can structure their portfolios in line with their time horizon and risk profile, subject to Regulation 28 of the PFA, which limits exposure to high-risk asset classes. At retirement, at least two-thirds of the capital must be used to purchase an annuity income, while up to one-third can be withdrawn as a lump sum (subject to tax).
Who should consider a retirement annuity?
Retirement annuities are ideal for:
- Self-employed individuals who don’t have access to an employer fund.
- Commission earners or freelancers with variable income who value flexible contribution options.
- Employees seeking to top-up contributions beyond what their employer fund allows.
Because you can contribute at your own pace and adjust contributions at any time, RAs suit those who value independence and control over their retirement savings.
How much can I contribute?
You may contribute up to 27.5% of the greater of your taxable income or remuneration per year, subject to an annual maximum deduction of R350 000. Contributions above this limit are considered non-deductible, but they’re not lost—SARS automatically rolls them forward for deduction in a future year and they continue to grow tax-free inside the RA.
What are the main benefits?
RAs offer a unique combination of tax advantages and legal protection:
- Tax-deductible contributions reduce your annual taxable income.
- No tax on dividends, interest, or capital gains within the investment.
- Tax-free growth ensures all compounding benefits accrue to you.
- Creditor protection: Section 37B of the PFA protects RA funds from creditors (with limited exceptions for tax, maintenance, and divorce orders).
- Estate-planning efficiency: RA benefits do not form part of your estate and are not subject to estate duty, although fund trustees determine the distribution of death benefits.
- Behavioural discipline: Because your funds are locked in until at least age 55, your RA protects your retirement money from impulse withdrawals.
How does Regulation 28 limit my investments?
To protect retirement savers from excessive risk, Regulation 28 limits exposure to certain asset classes. Currently, offshore exposure (including Africa ex-SA) is capped at 45%, while exposure to alternative assets such as private equity is limited to 15%. These limits apply across all retirement funds to ensure diversification and capital preservation.
What if I can’t afford to contribute?
If you hold a unit-trust-based RA, you may stop contributions at any time without incurring penalties—your investment simply remains invested and continues to grow. Older insurance-based RAs may still carry early-termination penalties during the initial recoupment period, so it’s worth confirming which structure you have.
Can I have more than one RA?
Yes. You can hold multiple RAs across different providers, though the tax deduction limit applies in aggregate across all of them. Some investors prefer multiple RAs to allow for flexible retirement timing—retiring from one fund at 55, for instance, and another later—to stagger income streams and manage tax more efficiently.
How does the Two-Pot Retirement System affect RAs?
From 1 September 2024, all retirement funds—including RAs—operate under the Two-Pot Retirement System, designed to balance long-term preservation with limited access to savings.
- The savings pot (one-third): From contributions made after 1 September 2024, one-third is allocated to the savings pot, which can be accessed once per tax year (subject to a minimum withdrawal of R2 000) and taxed at your marginal income tax rate.
- The retirement pot (two-thirds): The remaining two-thirds is preserved until you retire and must be used to buy an annuity income.
- The vested pot: All balances accumulated before 1 September 2024 remain subject to the old rules, meaning they can only be accessed at formal retirement or in limited cases such as permanent disability or emigration after three years of non-tax residency.
This system applies automatically; you do not need to take any action. The goal is to strike a healthier balance between liquidity and preservation, helping savers avoid depleting retirement capital prematurely.
What happens when I retire?
You can retire from your RA any time after age 55, with no upper age limit. Upon retirement:
- You may take up to one-third of the fund as a cash lump sum, with the first R550 000 currently tax-free (lifetime cumulative limit).
- The remaining two-thirds must purchase an annuity income, which can be a life annuity (guaranteed income for life) or a living annuity (investment-linked income with flexibility).
Each option has distinct pros and cons, and the decision should follow a formal retirement analysis that factors in longevity, liquidity needs, dependants, and tax.
What happens if I die before retirement?
If you pass away before retiring, your RA does not automatically form part of your estate. Instead, trustees of the RA fund are legally required to investigate and distribute the proceeds equitably among your dependants and nominated beneficiaries in terms of Section 37C of the PFA. Your nomination form acts as a guide but is not binding. Your beneficiaries can:
- Take a lump-sum payment (taxed according to the retirement tax table),
- Use the funds to purchase an annuity, or
- Opt for a combination of both.
Can I transfer my RA?
Yes. RAs can be transferred between providers in terms of Section 14 of the PFA. Note that such transfers are tax-neutral, meaning your investment value moves across intact without triggering a taxable event.
Are my RA funds safe from creditors?
Generally, yes. RA funds enjoy strong statutory protection under Section 37B of the PFA, which shields them from creditors in the event of insolvency. Exceptions apply for tax debts, maintenance orders, and divorce settlements in terms of a court order.
Retirement annuities remain one of the most effective vehicles for building long-term financial independence. With generous tax incentives, strong legal protection, and disciplined preservation, they form the cornerstone of a sound retirement strategy. The new Two-Pot Retirement System enhances this framework by giving investors a small measure of flexibility without undermining long-term savings goals. That being said, for anyone serious about achieving financial security in later life, the retirement annuity remains a cornerstone of sound retirement planning.
Have a wonderful day.
Sue
