The plans you make to cater for your retirement are vital. What you do as a younger person in preparation for entering your golden years will make the difference between living comfortably and relying on friends and family for lodging and essentials, or even finding yourself completely destitute and unable to earn an income. 

While this may sound dramatic, it is a harsh reality that many aging South Africans face. It’s why financial advisors are so concerned with the future financial decisions you make as a younger person. If you’re wondering what you should be doing to prepare for your senior years, then take the time to understand how retirement accounts work, the tax benefits they offer, and the rules surrounding them.  

In South Africa, there are three main types of retirement accounts, which include Retirement Annuities (RAs), Pension Funds, and Provident Funds. By doing a bit of research and engaging with financial experts, you’ll be able to make the best choice for what you want out of your golden years.  

Let’s unpack the main retirement accounts available, so that you can make an informed choice about your financial future.  

What Is A Retirement Annuity? 

Typically shortened to “RAs,” retirement annuities are not too complicated. Essentially, an RA is a personal retirement savings plan designed for individuals who do not have access to a workplace pension or provident fund. If you’re self-employed or a contractor, this would be an ideal option.  

Here’s what you need to know: 

• RAs are locked in until you reach 55 years of age. 

• At retirement, you can withdraw up to a third as a lump sum. 

• The remaining two-thirds must be used to purchase an annuity, which provides regular income in retirement. 

• You get major tax advantages, seeing as your contributions are tax-deductible, up to a limit of 27.5% of the taxpayer’s taxable income, capped at R350,000 per year. 

The Funds 

In contrast to the RA, you have two types of retirement funds. These are pension funds and provident funds and are described as employer-sponsored retirement savings plans. How it works for both options is that you contribute a portion of your salaries to the fund, and your employer may also contribute on your behalf. These funds grow tax-free until retirement, and like RAs, they enjoy tax deductions on contributions. 

Here’s how what you need to know: 

• Pension Fund: The goal is to ensure that you have a steady income during retirement and don’t exhaust your savings quickly. That’s why you’ll be able to take a third of your savings as a lump sum upon retirement, with the remaining two-thirds dedicated to buying an annuity for the purposes of regular income.  

• Provident Fund: While provident funds previously allowed for the entire balance to be drawn upon retirement, recent legislative changes have aligned provident funds more closely with pension funds. For contributions made after 1 March 2021, only up to a third of the savings can be taken as a lump sum, and the remaining two-thirds must be used to purchase an annuity. For contributions made before this date, retirees can still withdraw the full amount as a lump sum. 

Let’s Talk (Tax) Benefits 

Regardless of which type of retirement account you choose, the key benefit associated with all three is the tax relief. What this means is that SARS allows taxpayers to deduct contributions to these retirement accounts up to 27.5% of their gross remuneration or taxable income – whichever is higher. Before you think that this seems too good to be true, just note that the total amount deductible is capped at R350,000 annually. 

Why are we putting such an emphasis on this benefit? Well, this tax break provides an incentive to save for retirement while reducing the immediate tax burden. Added to this, the investment growth within any of these solutions is tax-free. It’s only upon the withdrawal of funds, either at retirement or in certain cases of early withdrawal, that your funds will be taxed. 

Withdrawal And Access 

Perhaps the most important thing to know about your retirement account is when you can access your funds and how much you can withdraw. Remember, a retirement account doesn’t operate in the same way that a typical savings account does. You generally can’t withdraw whatever you want, whenever you want.  

You see, in South Africa, early withdrawal from retirement accounts is heavily restricted. For RAs, your access is only allowed after the age of 55. There are two main exceptions, which is in cases of emigration or permanent disability. If you need more flexibility, then you may want to lean towards a pension fund or a provident fund. Both of these allow you access to your funds when you change jobs or resign from employment, though this comes with potential tax penalties. 

When you do retire, any lump sums withdrawn will then be taxed according to the retirement tax tables. Currently, the first R500,000 is tax-free, but any amounts above that are subject to tax, with higher amounts taxed at progressive rates up to 36%. 

Feeling informed?  

Through careful planning and understanding all the benefits, rules around access, and restrictions, you will be able to ensure that you make the most of the retirement account you choose and secure a financially stable future.  

Don’t forget that AA Inform is home to a range of useful financial tools and resources, including access our Loan Repayment Calculator, free property valuation reports, and multiple advice pieces on how to plan for your retirement.  

We trust that this will help you make the best choice for your financial future. We hope that all the tools we’ve linked will help you make the right choice and enjoy the benefits of car ownership while managing your expenses effectively.