What products to choose for your retirement savings needs

In this article, I explain two products that make starting to save wonderfully easy, namely retirement annuities (RAs) and tax-free savings accounts (TFSAs). If you have been diligent with your savings, and are already investing in these products, consider topping up your savings – especially if you are fortunate enough to receive a year-end bonus from your employer.

The role of RAs and TFSAs in retirement planning

RAs are well-known retirement savings products that have recently gained an additional feature: limited access to savings, which came into effect with the introduction of the two-pot retirement system. By contributing annually into an RA, which mainly aims to preserve your savings for retirement, you can – over time and with discipline – build up a pot of capital from which you can withdraw an income when you reach retirement age.

TFSAs are products that were introduced in South Africa in 2015, and while they were not specifically designed for retirement, the zero tax levied on growth in these products can be leveraged to supplement retirement savings invested in more traditional retirement savings vehicles.

When considering your long-term financial plan, the appropriate product choice will depend on your individual circumstances. A combination of both products may be a suitable way to achieve your desired outcomes by leveraging the benefits inherent in each, helping you to meet your retirement and savings goals.

The role of each product in a retirement plan

Retirement funds – including retirement annuities and preservation funds – form the core product suite supported by tax incentives and compulsory preservation requirements, as they are specifically designed to save for retirement. There is no maximum limit on the contributions you can make to your RA, but only 27.5% of your total taxable income contributed from your gross salary (up to an annual limit of R350 000) is tax deductible. This means saving in a retirement product lowers your assessed income on which personal income tax is levied.

Generally, you can make both recurring and lump-sum premium contributions to an RA. Any additional contributions made in a year above the annual limit may be used as a deduction on your taxable income in future years. The condition associated with this tax advantage is that you must (with limited exceptions) preserve your money until the plan’s set retirement date, which is generally at the age of 55.

In a tax-free savings account, regular contributions or a lump sum contribution may be saved every year, up to the maximum annual allowance of R36 000. An overall lifetime contribution limit of R500 000 applies to TFSAs.

Income, capital gains and dividends are not taxed on either of these products, making them both excellent options for those looking to save in a tax-efficient way.

While TFSAs may be used for a variety of needs, they are an excellent way to supplement your income on retirement, or they may be used in lieu of a lump-sum withdrawal from your RA at retirement – thereby allowing your full retirement savings to be invested in a post-retirement product, such as a living annuity or life annuity, without any tax implications.

Another key feature of both products is that there is no age limit on investing in them. If you are fortunate to be able to continue saving after your retirement, they may be used to continue saving in a tax-efficient way.

The two-pot retirement system’s impact on the use of each product

Following the implementation of the two-pot retirement system, access to savings in retirement annuities has been enhanced. From 1 September 2024, one third of your retirement contributions has been allocated to a savings pot, from which you can make an annual withdrawal. However, any withdrawals will be taxed at your marginal tax rate and cannot be fully replenished through future additional contributions if you have already used up your annual contribution allowance.

While the two-pot system has provided some access to otherwise inaccessible savings, this comes at a cost, as it is effectively a loan against your future self. By contrast, a disinvestment from a TFSA will not attract additional tax at the point of disinvestment, and may therefore be a more tax-efficient way of accessing savings if the need arises.

Tax advice is important before making any large withdrawal decisions, and speaking to a trusted financial adviser should be a key consideration before reaching out for a withdrawal form.

Conclusion

While RAs should still be considered as a traditional retirement savings vehicle, the tax advantages and simplicity of access to savings invested in a TFSA mean that when used together, these products offer excellent complementary features to save for retirement within set annual limits. Speak to your financial adviser to find out how you can make use of any unused contribution limits for this tax year and reach your savings goals for 2025.