How investors can maximise retirement annuity tax benefits

A retirement annuity can be a powerful tool for South African income earners looking to reduce their tax burden while saving for retirement. With a significant portion of income often going towards tax, making use of tax-efficient investment options becomes increasingly important.

Many investors don’t realise the tax-efficient nature of investing in a retirement annuity, and how this can help you save on the tax you pay, potentially improving long-term investment outcomes. By reinvesting the tax savings generated through contributions, investors can boost the growth potential of their retirement capital over time.

In this article, we will look at how you can make the most of your retirement annuity by looking at key factors such as contributions, fees and asset allocation, while maximising the available tax advantages.

What is a retirement annuity?

A retirement annuity (RA) is a long-term investment savings vehicle designed to help you save for retirement in a tax-efficient way. As of the 1st of March 2026, changes to RA contributions are tax-deductible up to 27.5% of your annual taxable income, with a cap of R430,000. Investment returns within the RA are exempt from income tax, dividends tax and capital gains tax while invested. This may allow for more of your returns to be reinvested and potentially build and compound over time.

You can contribute either a regular monthly contribution or a lump sum contribution to your retirement annuity, depending on your preferences. However, you will need to ensure that these match the minimums as stipulated by your service provider. You are able to retire from your RA at age 55 in South Africa. Your retirement annuity will then be used to fund an annuity of your choice, either a life annuity or a living annuity. This annuity will then provide you with an income for your retirement years.

In South Africa, there is a progressive tax system in place. This means that the more you earn, the more tax you will pay. In order to reduce your taxable income, you would look to make use of an RA.

Strategic contribution planning

You would look to contribute as much as possible to your retirement annuity in order to take advantage of the tax savings. For example, if you receive a bonus or any additional income, you may want to consider investing this in your RA to take advantage of the tax benefits. The earlier you are able to start contributing to an RA, the better, as this will allow you to take advantage of the power of compound growth and potentially improve the growth potential of your capital.

If you are a high-income earner, you would benefit from looking to maximise your annual contributions. High-income earners may find that they are paying a high percentage of their income in taxes due to the fact that they are in a high tax bracket.

RAs provide flexibility to meet changing needs over time, allowing you to adjust your contributions in order to match your income. As your income increases, you can increase your contributions, and conversely, if your income decreases, you can adjust your contributions accordingly.

A retirement annuity can be a great investment vehicle for self-employed individuals who may not have an employer-sponsored pension or provident fund. This will also allow you to save for your retirement years in a tax-efficient manner, while allowing for flexibility to cater for changing incomes from month to month.

Asset allocation considerations for retirement annuity investors

Along with taking advantage of the tax benefits associated with RAs, you would also look to be very strategic and carefully consider your asset allocation. Your asset allocation is the different mix of assets that your savings are invested in. You would choose from a mix of equities, real estate, bonds and cash, depending on your investor profile and your long term financial plan. Your investor profile looks at both your risk profile and your investment timelines. Asset allocation plays the biggest role in the performance of your retirement annuity - accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows.

Each of the different asset classes brings with it something different. A well-diversified portfolio across these different asset classes allows you to potentially balance both risk and return. At 10X, you have the freedom to adjust your underlying portfolio by choosing from a selection of carefully curated investment funds, each with a different mix of assets and geared towards different investor profiles.

Equities are essential for long term growth. They are also the most volatile of the asset classes. As data suggests, equities have historically produced returns above inflation by around 7% annually, over the long term (based on JSE All Share Index performance versus CPI from 1960-2020), although past performance does not guarantee future results.

Real estate, also known as property, can also produce some good returns while being a good hedge against inflation.

Bonds will add stability to your portfolio, but they may produce some lower returns. While bonds are generally seen as a more conservative option, they may still outperform what’s expected.

Cash may produce low returns, but it is also the most liquid and stable of the asset classes.

You would also want to consider Regulation 28 of the Pension Funds Act when structuring your asset allocation. This has been put in place to help investors avoid poorly diversified portfolios. This caps equity exposure at 75% and offshore exposure at 45%. You may wish to invest offshore as this can provide greater opportunities as well as be a good hedge against local market instability and possible depreciation of the rand.

Our funds at 10X include a range of well-diversified options that are also Regulation 28 compliant, allowing you to choose the fund that suits your particular needs best. Please visit our funds page for the most up-to-date information.

Why fees matter in your retirement annuity

You would want to aim to maximise the growth of your retirement annuity over time. This means that the more returns you are able to reinvest and potentially compound and grow over time, the greater the growth potential of your RA. If your fees are low, this means you may have more returns to reinvest, and these returns can then grow and compound over time. If your fees are higher, this may mean fewer returns to reinvest in order to compound and grow over time. There are some typical fees that you can expect to see deducted from your RA. Let’s have a look:

• Management fees: These are the fees charged for the running and management of the fund.
• Advisor fees: If you decide to make use of an advisor, they will charge fees for the advice and services that they provide. They may charge both an initial and an ongoing fee.
• Administration fees: There will be administration fees charged. These will relate to tasks such as compliance, reporting, tax and similar.

The Effective Annual Cost (EAC) is a standardised metric which was introduced in 2015 by ASISA. This shows you the total fees and costs of owning an investment product over one year of time. All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more returns may be reinvested and allowed to potentially grow over the long term. The EAC is usually expressed as a percentage on your statement. The EAC of an investment is just one factor to consider when comparing different service providers.

At 10X, we offer a handy EAC calculator that can be used to compare the EAC of your current investments with the EAC of 10X products. This tool is a part of our free online suite of resources available on our website. Let’s look at an example to help illustrate the effect of fees on your retirement annuity. We’ll assume the following factors for this example:

• Investment period of 30 years
• Initial lump sum investment of R50,000
• Monthly contributions of R2,000
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (1% Fees): Real investment value is approximately R1.8 million

Example 2 (3% Fees): Real investment value is approximately R1.3 million

As this example shows, a small difference in fees can have an impact on your real investment value, especially when this is compounded over time. This example is for illustrative purposes, and actual results may vary. You can learn more about the effect of fees here.

At 10X, we make sure our fees are low-cost, simple and transparent. This makes it easy for all investors to see exactly what they are being charged and also ensures that there are no hidden costs. Please explore our products for the most up-to-date fee information.

The introduction of the Two-Pot Retirement System

The Two Pot Retirement System, implemented in September 2024, has changed the way that contributions to and withdrawals from retirement products are handled in South Africa.

All contributions to retirement products are now split between a ‘retirement pot’ and a ‘savings pot’. There is also a third pot, which is called the ‘vested pot’. This vested pot includes all savings accumulated prior to September 2024. Withdrawals from the savings pot may be done once per year, for a minimum amount of R2,000, and are taxed at your marginal tax rate. There will also be an administration fee charged.

The savings pot should only be accessed in an emergency, and if possible, withdrawals should be avoided in an effort to take advantage of potential compound growth. Contributions will be split between the retirement pot and the savings pot, with one-third of contributions being allocated to the savings pot and two-thirds of contributions going to the retirement pot.

The retirement pot can only be accessed upon retirement, where it will then be used to purchase an annuity. The minimum retirement age is currently 55 in South Africa. Please review the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System.

Retirement annuity investment strategy: The value of index-based investing

Index-based investing is often a more cost-effective strategy, which may mean fewer fees for you, as the investor. There may then be more available returns to reinvest and potentially compound over time. Index-based investing is focused on consistent returns in the long term. A benchmark index, like the S&P 500, is tracked, with the aim of getting the same returns as this particular benchmark index.

An actively managed fund is where a fund manager works to find the best stocks. This involves different activities like researching, analysing and buying and selling, which may result in higher fees for you, as the investor. This approach is not always the most effective, as data from the SPIVA Scorecards suggest.

The S&P Indices Versus Active (SPIVA) Scorecards track the performance of actively managed funds against their benchmarks globally. According to the latest SPIVA South Africa Scorecard (as of June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending June 30, 2025.

Common mistakes investors make with retirement annuities

Let’s look at some mistakes we see investors make with retirement annuities:

1. Ignoring fees: Often, investors forget about fees. Your fees and EAC should be reviewed annually to ensure that they are not too high. Even a slight difference in fees may result in major differences at retirement.
2. Tax deductions: If possible, you would look to take advantage of tax deduction opportunities as far as possible. Contributing below the allowable limit may mean that you’re not taking full advantage of the tax benefits.
3. Investing very conservatively: Your asset allocation should generally include growth assets such as equities to pursue growth, which should be in line with your investor profile and long-term financial goals. A portfolio that is too conservative may limit its long-term growth potential.
4. Not increasing your retirement annuity contributions: You should think about increasing your contributions over time. This allows you to save more for retirement, as well as decreasing your taxable income.

Making the most of retirement annuities

A retirement annuity can offer you great tax benefits. If you make use of an RA, you can decrease your taxable income and ultimately the amount of tax which you need to pay. Your selected asset allocation should be well-aligned with your investor profile and long-term financial goals. Also, the importance of reviewing fees and EAC to check that you are not paying too much shouldn’t be overlooked, as fees play a major role in retirement outcomes.

Your retirement annuity can play a key role in your overall long-term financial plan. The experienced investment consultants at 10X are more than happy to answer all your queries surrounding retirement annuities. At 10X, we offer an RA that focuses on excellent returns and allows you to maximise your potential long-term retirement outcomes while also taking advantage of the tax benefits on offer. Get in touch today to learn more about our retirement annuity funds!