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Tax-free savings account vs. Retirement annuity? Who wins?


Tax-free savings account vs. Retirement annuity? Who wins?

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Should you be investing in a Retirement Annuity or a Tax-Free Savings Account?

The key ‘thing’ that differentiates both Tax-free savings accounts and Retirement Annuities from other investments, is their preferential tax benefits. If you have absolutely no idea what I am talking about, then you might want to check out “Tax in the investments world”.

So, it begs the question, which of these is the better option for you? Let’s break it down.

Tax benefits:

Retirement Annuities essentially allow you to invest your pre-tax (that is, pre-PAYE) money for retirement saving – subject to limits I will discuss below. Like your contributions, the growth in your investment is also not subject to tax. You would therefore only pay tax when you ultimately receive your benefits.  Not only do you postpone your tax bill, you also pay less tax because your income will most likely be lower at retirement than while you’re working. In addition, less tax is levied on retirement income than preretirement income by SARS.

The Tax-Free Savings Account also has great tax benefits. It allows you to invest your post-PAYE income into a tax-free investment (also subject to limits that I’ll touch on below). Unlike your contributions, you do not pay tax on the growth of your funds, and when you withdraw your money later on.

However, because with a Tax-Free Savings Account you do not defer/postpone your tax payment, you actually end up paying more tax than you would through a Retirement Annuity.

The Retirement Annuity is the clear winner.

Tax-free limits:

With a Retirement Annuity, you can invest tax-free contributions up to 27.5%, of your annual income; with a maximum of R350k. Tax-Free Savings Account, on the other hand, only allows you to benefit up to R33k per year and a lifetime limit of R500k.

Since you have higher tax limits, you can benefit more tax-wise via a Retirement Annuity.

Retirement Annuity > TFSA


How easily are you able access your money?

By law, you can only have access to your Retirement Annuity after the age of 55, or earlier if you are permanently disabled through injury or illness.  Unless you formally emigrate, you are not able to withdraw your money before then. You can, however, transfer from one Retirement Annuity to another.

The Tax-Free Savings Account, on the other hand, is much more accessible. Its accessibility, of course, depends on the particular product you are invested in, but regardless, it is still much more accessible than a Retirement Annuity.

IF you ever, therefore, need your money sooner than later, a Tax-Free Savings Account is better.

Tax-Free Savings Account > Retirement Annuity

Investment Choice:

Which gives you more say in where you are invested?

Retirement Annuities are governed by Regulation 28. This law places certain limits on what your RA can be invested in. Notably, you cannot invest more than 75% in shares, 25% in any investment out of South Africa, and no more than 10% in hedge funds. This can in certain cases feel limiting to an investor. However, the law is there to protect your retirement savings from reckless investing.

Tax-Free Savings Accounts have no such restrictions; you can invest in whatever you think is appropriate for you. You consequently have greater choice.

Tax-Free Savings Account > Retirement Annuity

Usage of the benefits:

When you ultimately receive your benefit, how much choice do you have in how you use your money?

With a Retirement Annuity; upon retirement you can only withdraw up to a third of it as a cash lump sum, the rest has to be used to purchase a pension to provide retirement income for you.

Tax-Free Savings Accounts have no restrictions on how you use your money when you receive it. It also does not place any limits on how much you can withdraw.

So which is better for you?

Well, that ’s a question best answered with “it depends”.

The better tool for retirement saving is the Retirement Annuity because it has the better taxation benefits. The fact that the money is inaccessible until 55 also gives it the chance to grow without interruption; essentially ‘forcing’ you to save. Tax-Free Savings Accounts, however, are a great tool to supplement your long-term savings as well as give you some flexibility with regards to access.

The better choice? Both! Use both products in a smart way to benefit from them. Tax-Free Savings Accounts were not introduced to compete with Retirement Annuities. They exist to encourage and supplement your long-term savings.


Benjamin is an Actuary working at a major financial services firm. He has experience in the valuation, design and distribution of wealth and investment products. Benjamin is insatiably passionate about teaching and empowering minds. All views expressed are Benjamin's own and neither reflect nor are influenced by the views of affiliated companies.

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