Should you put extra cash into your work pension or open a new retirement annuity?

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You’re earning well, you’ve got a workplace pension quietly ticking along, and then SARS hits you with a huge bill. Now, it’s painfully clear that your current deductions aren't exactly maximizing your tax benefits. You’re left wondering if claiming more retirement savings could lower that tax burden and, at the same time, build a bigger nest egg. But here’s the catch: do you top up your work pension or open a retirement annuity (RA) elsewhere? 

Do workplace pensions actually deliver better returns than index-tracking RAs? Will you miss out on your pension fund growth if you start something new? Does the flexibility offered by an RA give you a better chance to grow your retirement wealth? Considering 94% of South Africans don’t have enough saved for retirement, these are crucial questions to ask. Let’s unpack the options.

Making Sense of Your Workplace Pension

A workplace pension fund is the default option for many of us. But that doesn’t mean it’s simple. In fact, it can feel like a confusing black box, with little transparency or control. Here are the basics you need to know.

Pros:

• Employer contributions (if available): Some employers contribute 5 - 15% of your salary to your pension. That’s essentially “free” money that no RA can match.
• Simple deduction: Contributions are automatically deducted from your payslip, so saving happens without effort (and before tax).
• Institutional benefits: Workplace funds pool large amounts of money, which can sometimes be granted better access to investments or higher yields.

Cons:

• Restricted fund choice: Since your fund is chosen for you, investment options usually include only 3 - 5 strategies.
• Higher costs: Even good short-term returns can be undone by unclear or high fees over time.
• Lack of transparency: Online portals that feel like they were designed in the 80s, and poor reporting leaves you in the dark about where your money is invested or how it’s doing.

Bottom line: It’s mandatory, it’s automatic, and designed to be a “set it and forget it” kind of deal. But they’re often rigid and hard to understand. This is where an RA with another provider might have an advantage.

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A Closer Look at Retirement Annuities 

If your workplace pension is the status quo, an RA is the flexible challenger that puts control in your hands. You choose the provider, the funds, and how much you contribute. The key terms here are voluntary and chosen by you. Being in the driver’s seat lets you invest according to your goals, giving your money a better chance to grow.

Pros: 

• Wide choice of providers: Instead of a handful of strategies, an RA gives you hundreds of options. This empowers you to build a portfolio that actually matches what you’re trying to achieve.
• Potential lower fees: Many modern RAs are built to strip hidden costs. A 1% difference in fees alone could mean hundreds of thousands more come retirement.
• Transparent access: Newer RA platforms are modern, fully transparent, and usually let you see funds and fees in real-time. Many even have mobile apps.
• Flexibility in contributions: You decide how much to contribute (up to your annual retirement contribution limit of R350,000) and can increase, decrease, or pause contributions as you see fit.
• Diversification: With different managers and strategies, there’s lower concentration risk, meaning you’re not putting all your retirement eggs in one basket.

Cons:

• No employer contribution: Unlike workplace pensions, you don’t get the free top-up from your employer.
• Possible higher minimums: Some providers set minimum contributions, which can be higher than the automatic deductions from your payslip.
• Potential withdrawal restrictions: Like pensions, RAs are off-limits until retirement age (55+), with exceptions under the new two-pot system.

Bottom line: an extra RA gives you choice, transparency, and diversification, which can make your money work harder. A Retirement Annuity Calculator can help you figure out by how much. The RA does have one more trick up its sleeve, however: the “forced savings” tax advantage.

Same Tax Savings, Different Relief Timing

Both pensions and RAs let you deduct contributions from taxable income, meaning SARS effectively “co-funds” your retirement. The difference lies in timing.

• Immediate tax relief: Pension fund contributions come off before PAYE, so you pay less tax immediately each month. However, funds with poor visibility may also not reflect tax accurately, since that’s normally deducted before returns. 
• Longer-term tax relief: The same tax benefit, but in a different way. RA contributions are made after tax, so SARS refunds you (or reduces what you owe) at year-end. The savvy strategy? Reinvest that refund into a TFSA for completely tax-free growth and withdrawals, or back into your RA. Using RA refunds to fund TFSA growth gives you the best of both tax worlds.

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Either way, the benefit is the same: you can invest up to 27.5% of taxable income, capped at R350,000 per year. If you want a better idea of how much you can lower your taxable income, use a tax calculator.Inside both pensions and RAs, your money grows tax-free. According to Morningstar research, avoiding this "tax drag" can boost your nest egg by as much as 30% over 40 years. At this rate, R24,000/year in contributions saves you about R7,200 in tax. What this could look like in practice:

• Work pension: About R600 less tax every month.
• RA: A lump-sum refund of approximately R7,200 at year-end.

Tax perks are powerful, but they’re just one part of the growth story. The good news? Compounding isn’t exclusive to one type of fund.

Here’s What Actually Grows Your Money 

Whether your money is in a pension or an RA, if it’s invested and earning returns, you’re getting the benefits of compounding. What really matters: fees, fund choice, and tax treatment.

• Tax-free growth: No tax on interest, dividends, or capital gains, so compounding runs faster.
• Fees add up: If your workplace pension charges 1.5% in total fees but a low-cost RA charges 0.5%, that fee difference alone could mean 21% more money after 40 years.
• Think snowball: To grow into a boulder, your financial snowball needs a clear path. Compounding is what makes your money snowball. Fees and fund choice are what determine how fast it rolls.

In essence:

• Lower fees = more money to compound.
• Diversified fund choice = potentially stronger performance.
• Transparency = fewer panic moves and steadier growth (hopefully!).

How They Compare Side-by-Side

Let’s put it all together in a direct comparison. How do pension funds and RAs perform head-to-head?

Practical Strategy

The big question in all of this is how you can build a strategy that actually works for you. First, don’t assume that your workplace pension has super high fees. Many large employers use their size to negotiate competitive institutional rates. The best approach is to check the figures.

• Step 1: Check your employer contribution and Effective Annual Cost (EAC) Check your employer contribution rate and calculate its EAC. If it’s 5% or more of your salary, take advantage of this “free” money first.
• Step 2: Compare costs Get EAC quotes from at least two RA providers, including advisor fees if you have an advisor. Keep in mind that going direct and not consulting an advisor will save you money.
• Step 3: Decide how much control you want If your pension platform is frustrating and you value investment control, an RA may be a good option, all other things being equal.
• Step 4: Use tax breaks strategically RA contributions can double as year-end tax planning. Reinvest RA refunds into a TFSA, other investments, or even short-term goals. This ‘free extra investment’ potential is a very good argument to consider another RA.

The key takeaway is that it doesn’t have to be either/or. Many savvy savers do both: capture the employer match in their pension, then use an RA for control and diversification. 

The best option combines tax benefits, low fees, transparency, and performance that matches your goals. Run the numbers with an RA calculator and check your EAC. If you’re still not sure or want an expert to give you the facts let us help you with a no-obligation cost comparison. The answer is waiting for you in the data.