How much should you contribute to a retirement annuity?

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If you are using a retirement annuity to save for retirement, you may wonder how much you should be contributing towards it per month. There is, however, no correct figure; the amount that you contribute depends on a number of factors. The amount that you decide to contribute should align with your existing financial situation as well as your financial goals, and could be very different to the next person’s.

In this article, we will take a closer look at the factors that you should consider before deciding on a contribution amount that works best for you. This will include your income, your age, your contribution limits, your financial goals, investment timelines and more.

What is a retirement annuity?

A retirement annuity (RA) is a long-term retirement investment savings vehicle that allows you to save for retirement with some attractive tax benefits. Investment returns within the retirement annuity “wrapper” are also exempt from income tax, dividends tax and capital gains tax while invested. This means that you may potentially have more returns to compound and grow your retirement investment savings over the long term.

You can contribute via either a monthly debit order or an ad hoc lump sum amount, depending on your preferences. These will need to adhere to any minimum investment amounts as stipulated by your service provider. You can amend your debit order in order to cater to any changes in your financial situation.

What SARS allows and the rule of thumb for retirement annuities

Contributions that you make to your retirement annuity are tax-deductible to certain limits. As of the 1st of March 2026, these limits are up to 27.5% of your income and with a limit of up to R430,000 per annum. Any contributions above this amount will be rolled over to future years.

It’s key to start contributing to a retirement annuity as early as possible in your working career. This will allow you to take advantage of the power of compound interest and allow for more potential growth of your capital over time.

It also means that there is less pressure put on the later years when it comes to saving for retirement. Initially, as a young investor, you may look to contribute 10 to 15% of your salary to your retirement annuity. As you move into your 30s and 40s, you may consider increasing this to 20 to 25% of your salary. In your 50s, you may look to maximise your contributions within the applicable tax limits.

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Considerations for your personal target contribution

You would first look at what age you are targeting for retirement. Do you want to retire early, or are you going to be working until later in life? The earlier you plan to retire, the longer your retirement period may be, which could require higher savings during your working years

You would also need to consider your current age and how much time you have available to save for retirement. Are you starting off saving early in your working career, or are you an older investor? Investors who begin saving early have more time to benefit from compound growth. Those who start later may need to invest a higher percentage of income to reach similar retirement goals.

Additionally, you should consider the savings that you have already accumulated for retirement. If you have existing retirement investments, such as via a pension, provident or preservation fund, this should form part of your overall retirement planning.

‘Replacement ratio’ is often spoken about when it comes to retirement. This refers to what income you are targeting for your retirement years. The ‘replacement ratio’ in South Africa is around 70 to 75%. If you make use of this ratio, this would then mean that your monthly income target for retirement needs to be around 70 to 75% of your salary just before you retire.

By taking these factors into account, you can decide on a contribution level that is aligned with our retirement goals, current financial situation and long-term investment horizon. Feel free to use our retirement annuity calculator to help you build a reliable retirement plan.

he power of starting early

Starting your retirement savings early in life allows you to harness the power of compound growth. Starting later on in life, may require higher contributions, with this approach possibly still not being as effective as starting earlier on in life.

The earlier that you start saving, the more opportunity there is to take advantage of compound interest and compound growth.

Let’s look at an example to illustrate the power of compounding:

Example 1: In the first example, you start with a R1M lump sum and generate 6% real return (after fees and inflation have been taken into account) over 10 years. This would be an example of a later start.

Example 2: In the second example, you start with a R1< lump sum, but start your investment 20 years earlier - meaning that the capital remains invested for a total of 30 years - with the same 6% real return.

Example 1: You end up with approximately R1.73m.

Example 2: You end up with approximately R5.22m.

As this example highlights, the power of compound growth can be incredibly advantageous for your retirement annuity. Note that this is for illustrative purposes only, and real results may vary.

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The power of regular contributions

In addition to starting early, making consistent contributions to your retirement annuity can play a major role in building your long-term retirement savings.

Regular monthly contributions allow you to steadily grow your investment over time. Even relatively small amounts can accumulate meaningfully when invested consistently over many years. This disciplined approach also reduces the pressure of needing to make larger contributions later in life.

Consistent investing means you can also benefit from “rand-cost averaging.” This is a strategy of investing a fixed amount of money at regular intervals, regardless of market prices. So, when markets are higher, your contribution buys fewer investment units, and when markets are lower, your contributions buy more units. This can help smooth out the effects of market volatility over time.

Let’s look at an example to illustrate the effects of regular contributions:

Scenario 1: You decide to invest a R200K lump sum and generate a 6% real return over 30 years.

Scenario 2: You decide to invest a R200K lump sum, and also include a debit order of R1,000 per month for 30 years, which also generates a 6% real return.

In Scenario 1, you end up with around R1.15 million.

In Scenario 2, you end up with approximately R2.15 million.

We can see how disciplined, regular investing can contribute to strong retirement outcomes. Please note that this example is for illustrative purposes only and real results may vary.

The role of asset allocation in determining contribution levels

Your expected returns may also have an impact on determining your contribution levels. The asset allocation that you choose can have an impact on your returns. 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.

When you are considering your asset allocation, you would look at equities, real estate, bonds and cash. Equities are considered the most volatile of the asset classes whilst also likely to generate the best returns in the long term. 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), however, past performance does not guarantee the future results.

Real estate could provide you with a good hedge against inflation as well as some strong returns. Bonds can add some stability to your portfolio, but they are also likely to generate some lower returns. This doesn’t mean that bonds will never outperform what’s expected, but merely that they are seen as a more conservative option. Cash is likely to generate the lowest returns of all the asset classes, but it is the most liquid and stable of all. At 10X, we offer you a range of funds that are well-diversified across the different asset classes, each geared to different investor profiles, while also adhering to Regulation 28. Please visit our funds page for the most up-to-date information.

Diversifying across the four asset classes can provide a good balance between risk and return. If you are considering including some offshore exposure in your portfolio - which can provide a good hedge against local market volatility and any depreciation of the Rand - you need to consider Regulation 28. Regulation 28 of the Pension Funds Act puts a limit on the percentage of equities and offshore exposure that you may have. Current limits allow a maximum of 75% in equities and 45% offshore.

More aggressive portfolios with a higher percentage of equities may generate better returns over the long term, while more conservative portfolios that are more heavily invested in cash may generate lower returns in the long term, which may then mean that higher contributions are required to meet your long term financial goals and plan. You would look to ensure that your asset allocation is well-aligned with your investor profile, your risk profile and investment timelines, as well as your long-term financial goals and plans.

Why fees may affect how much you need to contribute to your retirement annuity

Higher fees may mean that there are fewer returns available to be reinvested which may then necessitate the need for higher contributions. If the fees that you are paying are lower, you may then have more returns available to reinvest and potentially grow over the long term. The effect of higher fees may be even more evident when compounded in the long term. Let’s look at an example to compare higher fees (3%) with lower fees (1%) to help illustrate the effect that fees may have on your RA.

• 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

A small difference in fees can impact your retirement annuity’s final investment value, so fees should be carefully watched at all times. You can learn more about fees here. Please note that this example is for illustrative purposes only, and real results may vary. Learn more about the impact of fees here.

You may want to also check your Effective Annual Cost (EAC). This will be shown on your statement or you can request it from your service provider. Your EAC is a standardised metric that was introduced by ASISA. It allows you to compare your current EAC with that of 10X and then evaluate your findings. 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 of an investment should just be one factor to consider when comparing different service providers. Feel free to use our EAC calculator to compare service provider fees.

At 10X, we charge simple, transparent and low-cost fees. This allows for more of your returns to be reinvested and potentially grow over time. Fees on retirement products are usually less than 1%, depending on the product chosen and the amount invested. Please explore our products for the most up-to-date fee information.

Adjusting contributions over time

Retirement annuities offer flexibility and allow you to adjust your contributions over time in order to align with your changing needs and requirements. As your salary increases over time, you may be encouraged to increase your contributions to your RA. Incrementally increasing contributions as your income grows can help you steadily improve your retirement outlook without placing too much pressure on your existing budget. If you receive an annual bonus, you may like to make a lump sum contribution to your RA.

It can be useful to have a regular debit order contribution set up, as this will help you with consistent and disciplined investing. Automating your contributions helps make sure that your retirement savings remain a priority and reduces the temptation to delay investing. Each year, you may want to look to review your retirement annuity and ensure that both your contributions and underlying investments are still aligned with your long term goals and targets. As your financial situation evolves over time, such as through changes in income, family circumstances or retirement goals, your contribution levels can be adjusted accordingly.

Common mistakes to avoid with your retirement annuity

There are a few common mistakes that investors may make when it comes to their retirement annuity. Let’s have a look at some of these:

1. Not increasing contributions as your salary grows: If possible, you may want to look to increase your retirement annuity contributions as your salary increases.
2. Stopping contributions during a market downturn: You would ideally look to continue your regular contributions, even during a market downturn.
3. Ignoring fees: Fees should be carefully monitored and high fees should be minimised. You would also look to review your EAC annually.
4. Not reviewing your asset allocation: You may want to review your asset allocation annually and ensure that this is still well-aligned with your long-term goals.

Retirement annuity contributions: Final thoughts

The right retirement annuity contribution amount depends on a number of factors. These are factors such as; your age, investment timelines, income and financial goals. These factors should be carefully considered along with your asset allocation and fees. Starting your retirement annuity savings earlier in life allows you to take advantage of compound growth and reduces the pressure on you to save later on. As always, you want to make sure you align your strategy and decisions with your long-term financial plan and goals.

At 10X, our low-cost and transparent Retirement Annuity makes it easy for you to invest and make any changes according to your evolving needs and goals over time. Get in touch today and let more of your money work for you.