Understanding the legal framework governing retirement annuities in South Africa

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Retirement annuities are a long-term retirement savings vehicle that offers a tax-efficient means of saving funds for retirement. They are, however, subject to regulatory oversight by way of the Pension Funds and Income Tax Acts, which means there are rules and regulations that must be adhered to. As an investor, it’s important to be aware of the rules surrounding withdrawals, contributions, and tax deductions.  

Understanding the legal framework surrounding retirement annuities will also help you maximise the tax benefits being offered. In this article, we will take a deeper look at the regulations relating to retirement annuities to help you understand how retirement annuities work and what you need to consider before opening one.  

What is a retirement annuity? 

A retirement annuity is a tax-efficient retirement savings vehicle. The tax benefits make it a popular choice amongst investors saving for retirement. Retirement annuities are different to a pension or provident fund, which are usually employer-sponsored.  

A retirement annuity is an investment product which, alongside several benefits, also comes with regulations that you, as an investor, are obliged to follow. These regulations are put in place to help protect investors from making decision that might adversely affect their retirement. 

Key legislation governing retirement annuities 

There are a few legislative acts and authorities which oversee retirement annuities in South Africa. These are: 

Income Tax Act (1962): This act governs the access that the investor has to their retirement funds and includes provisions such as annuitisation rules. This dictates that at retirement, part of the retirement fund must be used to purchase an annuity. The act also regulates the tax deductibility of contributions and the tax treatment of lump-sum withdrawals.   

Pension Funds Act (1956): This act governs and regulates retirement products in South Africa, including retirement annuities. The act covers the registration, administration and management of retirement annuities. It covers the duties and responsibilities of fund trustees.  

Regulation 28 of the Pension Funds Act: This sets out the limits regarding the asset allocation of your retirement products. The regulation is designed to protect investors by promoting diversification and managing risk.    Financial Sector Conduct Authority (FSCA): This is the regulatory body governing financial institutions that provide financial services and products. It ensures that investors are treated fairly and correctly and that institutions operate with integrity. The FSCA also oversees the disclosure and transparency practices of retirement fund providers.  

SARS: It is the role of the South African Revenue Service (SARS) to enforce the Income Tax Act and ensure compliance with tax rules related to retirement annuities. SARS monitors contributions, withdrawals, as well as tax benefits and penalties.  

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Regulation 28: Protecting investors through asset allocation limits  

Regulation 28 of the Pension Fund Act aims to protect investors against poorly diversified portfolios by putting limits on the percentage of total assets that can be invested in certain asset classes. Regulation 28 applies to retirement products, such as retirement annuities, pension funds and provident funds. In terms of the existing limits, you are currently allowed to invest up to 45% of your retirement annuity in funds offshore and up to 75% of your retirement annuity in equities.  

The asset allocation refers to the mix of different assets in which your funds are invested. This is typically a mix of equities, bonds, real estate (property) and cash. Equities are considered to be the most volatile of the asset classes, but they may realise the best returns over time. Equities are considered to be higher-risk, so by imposing limits, this can add some protection for you, as an investor. 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 future results.  

Bonds are more stable but may realise lower returns. Cash is the most stable of the asset classes but is likely to produce the lowest returns. Diversifying across the different asset classes is recommended. This allows you, the investor, to take advantage of good returns in certain asset classes while potentially mitigating against losses in other asset classes.  

Taking into account Regulation 28 limits concerning offshore limits, you may wish to consider offshore investments for further diversification. This will allow you to take advantage of the potential good returns offshore as well as provide a hedge against local market instability and the potential depreciation of the Rand.   

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The FSCA regulates institutions that provide services and products, such as RAs, to ensure that they are treating customers fairly. If you do have a complaint, you can lodge this complaint with the Pension Fund Adjudicator to address. 

At 10X, we offer a range of well-diversified funds which are suitable for different investor profiles and risk-tolerance levels. At 10X, we understand the importance of asset allocation in the long-term performance of your retirement annuity. For this reason, our funds have been carefully picked with the aim of helping clients get the excellent returns that they deserve. To find out more about the funds that we have on offer, follow this link.  

The Income Tax Act: Contributions, deductions, and tax benefits  

Contributions to retirement annuities are tax-deductible, subject to annual limits; these are up to 27.5% of your income, to a maximum of R350 000. Investment returns within the RA are also exempt from income tax, dividends tax and capital gains tax while invested. This allows for more of your returns to be invested and potentially grow and compound over the long term. 

You can make regular contributions in the form of a debit order (most service providers will have a minimum debit order amount of around R500 or R1000 per month) or, if you prefer, you may make a lump sum contribution (there will usually be a minimum requirement here too) into your RA. You can adjust your contributions in accordance with your financial needs and circumstances, and this flexibility is a big part of the appeal. This is especially useful to self-employed individuals.   

Lump sum withdrawals are taxed upon retirement, allowing for the first R550 000 to be tax-free; the remainder will be taxed according to the retirement lump sum tax tables.  

The Two-Pot Retirement System and retirement annuities 

There have been some changes regarding withdrawals from retirement products. The Two-Pot Retirement System was introduced in September 2024 by the National Treasury. This has changed the way that withdrawals from retirement products operate in South Africa. All contributions to retirement products are now split between two pots, a ‘retirement’ and a ‘savings’ pot. Two-thirds of contributions will be invested in the retirement pot, and one-third of contributions will be invested in the savings pot. There is also a third pot, which is called the ‘vested pot’. The vested pot includes all savings accumulated before September 2024. The vested pot is governed by the old rules, which were in place prior to September 2024.  

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Withdrawals from the savings pot may be done once per year for a minimum amount of R2000. Withdrawals are taxed at your marginal tax rate, and you will also be charged an administration fee for these transactions. If possible, withdrawals should be avoided, and the savings pot should only be accessed in an emergency, such as to settle medical bills. The retirement pot can only be accessed upon retirement, where it will then be used to purchase an annuity. The retirement age is currently from age 55 in South Africa. Please consult the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System.  

Annuitisation rules at retirement  

Upon retirement, you, as an investor, will be faced with some choices regarding your retirement annuity. Under current legislation, you may withdraw up to one-third of your RA savings as a lump sum in cash, subject to tax. The remaining two-thirds must be used to purchase an annuity. This may be either a life annuity or a living annuity. This annuity will then provide you with an income during retirement. You can withdraw a maximum of one-third of your vested pot in cash. This will be taxed according to the retirement lump sum tax tables, which are as follows (taken from the SARS website):  

If your total RA value at retirement is less than R247,500, you can withdraw the full amount as a lump sum without the requirement to purchase an annuity.  

What happens on death or emigration  

Let’s have a look at how RAs are dealt with upon the passing of an investor. Retirement annuities are governed by the Pension Fund Act, and not solely dictated by your wishes as stated in your will. In other words, your will does not exclusively decide who is to receive funds from your retirement annuity upon death. The fund trustees of the retirement annuity are given the task of deciding to whom the death benefit will be allocated. They will look at both the nominated beneficiaries and also financial dependents, in order to make a fair decision that is in accordance with the Act.  

The rules regarding emigration were changed in March 2021. Before March 2021, you would be able to notify the South African Reserve Bank that you were emigrating, confirm your tax resident status and then this would allow you to withdraw your retirement funds right away.  

In March 2021, new legislation came into effect, marking the start of the ‘three-year rule’. This means that you must, firstly, no longer be a South African tax resident and notify SARS thereof, and secondly, you must ensure that you haven’t lived in the country for the last 3 years (as a non-tax resident) or longer.  Both steps must be completed before you can withdraw your retirement funds. You can apply for an Emigration Tax Clearance certificate from SARS. 

Fees and your retirement annuity 

Another important factor when managing your RA are the fees being paid. While fees can often be overlooked, they can make a major difference in the potential growth of your savings. Typical fees which you may see charged on your RA are the following: 

Administration fees: These are the fees charged for related administration tasks such as tax or compliance. 

Advisor fees: These are the fees charged by an advisor for their services. You may see both an initial and an ongoing fee charged. 

Management fees: These are the fees charged for the management of the fund. 

Higher fees may impact the growth of your RA, especially when these fees are compounded over the long term. Lower fees may mean that there are more returns available to be reinvested and potentially compound and grow over the long term. Let’s look at an example to explain the effect of high fees on your retirement annuity. We will compare fees of 3% and 1%. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Initial lump sum investment of R50,000 
• Monthly contributions of R2000 
• 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  

We can see how a difference of 2% in fees can have a significant impact on the real investment value of your retirement annuity, especially when this is compounded over time, as this example illustrates. This example is for illustrative purposes only, and actual results may vary.  

10X has a transparent and cost-effective fee structure. The fees charged on retirement products are generally less than 1%, although this does depend on the product selected and the amount being invested. To find out the most up-to-date fee information, please refer to our website. 

Conclusion: Retirement annuities and the law 

Being aware of the rules and regulations surrounding retirement annuities in South Africa is crucial if you want to make use of this product optimally and avoid any surprises. The laws detailed in this article have been put in place to help protect you, as an investor, and help to ensure that you are treated fairly and with your best interests at heart.  

If you have any further questions or queries regarding retirement annuities and their regulations, please don’t hesitate to contact our experienced and knowledgeable investment consultants at 10X. Get in touch today to secure your future!