When choosing a retirement investment product you have to consider the benefits and challenges of each to make the right choice.
While we are warned that most South Africans will have to work until they are 80 years old because we do not save enough for retirement, it is also important to choose the right retirement investment products to ensure that our money grows enough.
The big choice is between a tax free savings account and a retirement annuity. Linda Kleynscheldt, head of actuarial and product at PSG Wealth compared the two options based on who can invest in these products, the tax implications and contribution limits, access to your funds, estate planning and protection from creditors and asset class choices.
Who can invest in these retirement investment products?
Kleynscheldt says both options are open to all individuals. “For tax-free savings accounts there are no age restrictions for making contributions, while contributions may be made up to the maximum retirement age stipulated by the product provider into retirement annuities.
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Tax implications and contribution limits
Both options offer tax-free growth while your money remains invested. This means there is no tax on the interest, dividends or capital gains in either of these investment vehicles, Kleynscheldt says.
“When contributing to a tax-free savings account, the funds you invest will already have been subject to income tax. However, contributions to retirement annuities effectively lower your taxable income as Sars will deduct retirement annuity contributions up to a maximum of 27.50% of your taxable income, capped at R350 000 each tax year when you submit your tax return, which means that you can actually save on your tax liability by contributing to a retirement annuity.”
Kleynscheldt points out that contributions to tax-free savings accounts are limited to R36 000 per tax year and R500 000 in your lifetime. “In contrast, there are no annual or lifetime contribution limits on contributions to retirement annuities and excess contributions can be rolled over to future years.”
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Access to your retirement savings
Before the introduction of the two-pot retirement system on 1 September 2024, members of retirement annuities could only access their pension savings funds at the age of retirement (currently 55), with a few exceptions, such as emigration or permanently disability.
Kleynscheldt says the introduction of this legislation brought about changes that give members greater access to their retirement savings before retirement. “Members can now make one withdrawal per tax year from the part of their retirement fund known as the savings pot, subject to a minimum withdrawal amount of R2 000.
“However, you must remember that you could be liable for additional taxes if your withdraw funds from this pot, as these will be taxed at your marginal tax rate. Members can also make one lump-sum withdrawal from their vested pot in their lifetime, which will be taxed according to the withdrawal tax tables.”
She emphasises that you must remember that you cannot make withdrawals from the retirement pot portion of your annuity before retirement.
Tax-free savings accounts, on the other hand, allow investors to access their funds at any time, tax free, making these products a flexible choice for emergency needs as well as long-term investment goals.
“However, withdrawals from tax-free savings accounts cannot be added back to your annual or lifetime limits. Withdrawals from these products will therefore reduce the capital amount available to compound interest over time, resulting in lower returns over the long term.”
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Estate planning and protection from creditors
In a tax-free savings account the funds become part of your estate if you pass away, which could incur estate duty and executor fees, Kleynscheldt warns.
However, annuities do not form part of your estate and therefore the proceeds of these investment vehicles are transferred to beneficiaries without executor fees charged. Retirement annuities also provide creditor protection, meaning your retirement savings are safe from potential claims if you face debt issues.
Tax-free savings accounts, on the other hand, do not offer this protection, she says.
Asset class choices
Both products offer access to a wide range of asset classes to suit different risk levels, but retirement annuities are subject to Regulation 28, which limits exposure to high-risk asset classes to ensure safe retirement savings, Kleynscheldt says.
“Tax-free savings accounts are not bound by these limits, giving you more freedom in investment choices.”
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Benefits and drawbacks
In general, a tax-free savings account offers flexible, tax-free growth and easy access to funds, which could be ideal for medium- to long-term goals, while annuities provide upfront tax benefits, estate planning advantages and creditor protection, making them a strong choice for longer-term savings to retire on, Kleynscheldt says.
“It is always important to consider your goals, tax situation and retirement plans when deciding which product to invest in. Speaking with a trusted financial adviser can help you build a savings strategy tailored to your specific needs.”
