If you’re self-employed, a freelancer, or simply want to boost your retirement savings beyond your employer’s pension fund, you’ve probably heard about Retirement Annuities (RAs). But between the tax jargon, Regulation 28 restrictions, and various fund options, RAs can seem unnecessarily complicated.

Let’s cut through the confusion. This guide will walk you through everything you need to know about Retirement Annuities in South Africa – from how they work and their tax benefits to practical strategies for making the most of your RA, especially if you’re self-employed.

What Exactly Is a Retirement Annuity?

A Retirement Annuity is essentially a personal pension plan that you set up yourself. Unlike a company pension or provident fund where your employer makes contributions on your behalf, an RA is entirely in your control.

Think of it as a tax-advantaged investment account specifically designed for retirement. You contribute money regularly (or in lump sums), that money gets invested and grows over time, and when you reach retirement age, you can access it according to specific rules.

RAs are governed by the Pension Funds Act, which means they come with certain protections and restrictions. The big trade-off is this: in exchange for generous tax benefits now, you agree to lock your money away until at least age 55, and you must use at least two-thirds of it to buy an income-producing annuity at retirement.

Who Should Consider a Retirement Annuity?

RAs are particularly valuable for:

Self-Employed Individuals and Freelancers

If you don’t have access to an employer-sponsored pension fund, an RA is your primary tool for building retirement savings in a tax-efficient way. Whether you’re a consultant, contractor, small business owner, or gig economy worker, an RA gives you the same retirement benefits that salaried employees get through their workplace pensions.

Employees Who Want to Save More

Even if you have a company pension, you might find the contributions aren’t enough to maintain your desired lifestyle in retirement. An RA allows you to top up your retirement savings beyond what your employer provides.

High Earners Looking for Tax Relief

If you’re in a high tax bracket, RA contributions can significantly reduce your tax bill. The ability to deduct up to 27.5% of your taxable income (capped at R350,000 per year) can result in substantial tax savings.

People Who Need Forced Discipline

The fact that you can’t access RA funds before age 55 (except in cases of emigration or permanent disability) might seem like a downside, but it’s actually a powerful feature. It protects your retirement savings from your present-day self who might be tempted to raid the account for a new car or holiday.

The Tax Benefits: Why RAs Are So Powerful

The tax advantages of Retirement Annuities are genuinely compelling. Here’s how they work:

1. Upfront Tax Deduction (27.5% Rule)

This is the big one. You can deduct your RA contributions from your taxable income, up to 27.5% of the greater of your taxable income or remuneration, capped at R350,000 per year.

Let’s break that down with a practical example:

Scenario: Self-employed consultant earning R600,000 per year

• Maximum RA contribution: R600,000 × 27.5% = R165,000
• Marginal tax rate (2026): 39% (for income between R365,000 and R550,000)
• Tax saving: R165,000 × 39% = R64,350

In other words, a R165,000 RA contribution only costs you R100,650 out of pocket because SARS effectively contributes R64,350 through reduced tax. That’s like getting a 64% return on investment immediately, before any actual investment growth!

For self-employed individuals, this deduction reduces your taxable income when you submit your annual tax return. You’ll either get a refund or pay less tax than you would have without the RA contribution.

2. Tax-Free Growth Inside the RA

While your money is invested in the RA, all growth is completely tax-free. This means:

• No dividends tax on local dividend-paying shares or ETFs
• No interest tax on bonds or money market holdings
• No capital gains tax when you sell investments within the RA

This tax-free compounding accelerates your wealth accumulation significantly over decades. Compare this to a normal taxable investment account where you’d pay dividends tax (20%), interest tax (at your marginal rate), and capital gains tax (effective rate of up to 18% for individuals).

3. Tax-Free Lump Sum at Retirement

When you retire and withdraw from your RA, the first R500,000 is completely tax-free. Amounts above that are taxed on a sliding scale, but it’s still favorable compared to ordinary income tax.

The retirement lump sum tax table (2026) looks like this:

• R0 – R500,000: 0% tax
• R500,001 – R700,000: 18%
• R700,001 – R1,050,000: 27%
• Above R1,050,000: 36%

4. Estate Planning Benefits

RA funds don’t form part of your estate, which means:

• No estate duty (currently 20% on estates over R3.5 million)
• No executor’s fees (typically 3-4% of estate value)
• Faster payout to beneficiaries (though the fund trustees must ensure dependants are provided for)

5. Creditor Protection

In terms of Section 37B of the Pension Funds Act, your RA is protected from creditors if you’re declared insolvent. There are exceptions (SARS debts, maintenance obligations, and divorce settlements), but this provides significant asset protection for business owners and self-employed individuals who face more financial risk than salaried employees.

Understanding Regulation 28: What It Means for Your Investments

Regulation 28 of the Pension Funds Act is often mentioned but rarely explained clearly. Here’s what it actually means for your RA investments.

Regulation 28 sets limits on how retirement funds can invest to prevent excessive risk-taking. The main restrictions are:

• Equities (shares): Maximum 75% of the portfolio
• Property: Maximum 25%
• Foreign assets (including Africa): Maximum 45%
• Africa (excluding SA): Maximum 10%
• Single underlying asset: Maximum 15%

What This Means in Practice

For most boring investors, Regulation 28 isn’t actually restrictive – it’s protective. The limits prevent you from making overly aggressive bets that could destroy your retirement savings.

You can still build an excellent portfolio within these limits. For example, a simple three-fund portfolio for a younger investor might look like:

• 40% Satrix MSCI World ETF (international exposure)
• 35% Satrix 40 or Satrix SWIX (local equity)
• 25% Satrix GOVI or bonds (fixed income)

This portfolio is perfectly compliant with Regulation 28 while providing good diversification across local and international equities and bonds.

The 45% Foreign Limit: A Real Constraint

The one restriction that might genuinely limit you is the 45% offshore exposure cap. If you believe (as many do) that South African investors should have more international exposure to diversify away from SA-specific risks, this can feel limiting.

The solution? Use your RA for local exposure and balanced portfolios, and hold more international investments in your Tax-Free Savings Account (TFSA) or general investment accounts, which aren’t subject to Regulation 28.

How Much Should You Contribute to Your RA?

This depends on several factors, but here’s a practical framework:

Start with the End in Mind

Most financial planners suggest you’ll need 75-80% of your pre-retirement income to maintain your lifestyle in retirement. If you earn R50,000 per month now, you’ll likely need R37,500-R40,000 per month in retirement (adjusted for inflation).

To generate that income, you’ll need a substantial capital base. A common rule of thumb is the “4% rule” – if you can safely withdraw 4% of your retirement savings per year, you need 25 times your desired annual income saved up.

Example: If you need R450,000 per year (R37,500 × 12 months), you’d need approximately R11.25 million saved at retirement.

The 15% Rule for Employees

If you’re employed and your company contributes to a pension fund, aim for a combined contribution (yours + employer’s) of at least 15% of your gross income. If your employer contributes 7.5%, you should add another 7.5% to your RA.

The 20-27.5% Rule for the Self-Employed

Without an employer contribution, self-employed individuals should aim to save 20-27.5% of their income for retirement. Yes, this sounds like a lot, but remember:

1. The tax deduction makes it cheaper than it appears
2. You don’t have the cushion of an employer pension
3. Self-employed people often can’t (or don’t want to) work into their late 60s

A practical approach for self-employed individuals:

• In your 20s-30s: Contribute 15-20% of income
• In your 40s: Increase to 20-25%
• In your 50s: Max out at 27.5% if possible

Maximizing Tax Benefits

If you’re in a high tax bracket (31% or above), it makes sense to contribute as much as possible up to the 27.5% / R350,000 limit. The tax savings alone make it worthwhile.

However, don’t over-contribute beyond the deductible limit unless you’re certain you won’t need that liquidity. Any contributions above 27.5% don’t get immediate tax benefits (though they roll over to future years) and are locked away until retirement.

Choosing Your RA Investment Strategy

Modern RAs are typically unit trust-based and offered on investment platforms (LISPs), giving you flexibility in how your money is invested.

Age-Based Asset Allocation

Your investment strategy should match your time horizon until retirement:

Ages 25-40: Aggressive Growth (80-90% Equities)

• 40% International equities (Satrix MSCI World or similar)
• 40% Local equities (Satrix 40, Satrix SWIX)
• 20% Bonds (Satrix GOVI, Satrix ILBI)

Ages 40-50: Moderate Growth (65-75% Equities)

• 35% International equities
• 35% Local equities
• 30% Bonds and cash

Ages 50-55: Conservative Growth (50-60% Equities)

• 30% International equities
• 25% Local equities
• 35% Bonds
• 10% Cash/Money market

The Simple Three-Fund RA Portfolio

For busy self-employed people who don’t want to constantly tinker with their investments, a simple three-fund portfolio works beautifully:

1. International equity fund (Satrix MSCI World, Allan Gray Orbis): Captures global growth
2. Local equity fund (Satrix 40, Satrix SWIX): Provides SA market exposure and rand dividends
3. Bond fund (Satrix GOVI, bond ETFs): Reduces volatility and provides income

Adjust the proportions based on your age and risk tolerance, rebalance once per year, and let compound growth do its work over decades.

Low-Cost Index Funds: The Boring Investor’s Best Friend

When choosing funds for your RA, fees matter enormously over 20-40 years. A 1% difference in fees can cost you hundreds of thousands of rands over a career.

Low-cost index-tracking ETFs and funds typically charge 0.10-0.40% per year, while actively managed funds might charge 1.5-2.5% annually. Over 30 years, that fee difference compounds dramatically.

For most investors, a portfolio of low-cost index funds will outperform expensive active funds after fees, while requiring less maintenance and worry.

RA Strategies for Self-Employed Individuals

Self-employment brings unique challenges and opportunities when it comes to retirement planning:

Strategy 1: The Variable Contribution Approach

Unlike salaried employees with consistent monthly income, many self-employed people have irregular earnings. Some months are flush, others are lean.

Set up your RA to accept ad-hoc contributions without penalties. Then:

• Contribute a small base amount monthly (say R2,000-R5,000)
• Make larger lump-sum contributions when you have good months or receive big payments
• Aim to hit your annual target (15-27.5% of income) by year-end

This approach gives you flexibility while ensuring you’re consistently saving for retirement.

Strategy 2: The Year-End Top-Up

Many self-employed people pay provisional tax and only know their final taxable income at year-end. Here’s a smart approach:

1. Calculate your exact taxable income in February (before the tax filing deadline)
2. Determine your optimal RA contribution (up to 27.5% of income)
3. Make a lump-sum contribution before end of February
4. Claim the deduction on your tax return and get a refund

This strategy maximizes your tax benefit while maintaining liquidity throughout the year.

Strategy 3: The Good Year Windfall Plan

When you have an exceptional income year – maybe you landed a huge client or sold a business – use your RA strategically:

• Contribute the maximum R350,000 to your RA
• This reduces your taxable income significantly
• If you can’t use the full deduction this year, it rolls over to next year

This prevents you from paying unnecessarily high tax in bumper years while accelerating your retirement savings.

Strategy 4: The RA + TFSA Combination

For maximum tax efficiency, use both an RA and a Tax-Free Savings Account:

• RA: Contribute enough to maximize tax savings (up to 27.5% / R350k)
• TFSA: Max out your R36,000 annual contribution for complete tax-free growth and access

The RA gives you upfront tax relief and forced long-term savings. The TFSA provides tax-free growth with flexibility – you can access it before retirement if needed for emergencies or opportunities.

Together, these two vehicles create a powerful tax-efficient retirement strategy.

What Happens at Retirement? Understanding Your Options

When you reach age 55 (or older), you can retire from your RA and access the funds. Here’s what you need to know:

The One-Third / Two-Thirds Rule

You can take up to one-third of your RA as a cash lump sum (taxed according to the retirement lump sum table). The remaining two-thirds must be used to purchase an annuity that provides regular income.

Exception: If your total RA value is less than R247,500, you can take the entire amount as cash.

Choosing Your Annuity: Life Annuity vs Living Annuity

Life Annuity (Guaranteed Annuity):

• You hand your capital to an insurer
• They guarantee a fixed income for life (with or without inflation increases)
• You can’t outlive this income (longevity protection)
• But you lose control of the capital and flexibility

Living Annuity (Investment-Linked Annuity):

• You keep your capital invested
• You draw an income (2.5% – 17.5% per year)
• You control the investments and withdrawal rate
• Remaining capital passes to your heirs
• But you risk running out of money if you withdraw too much or markets perform poorly

Most self-employed people prefer living annuities for the flexibility and control. However, consider a hybrid approach: use part of your capital for a life annuity (for guaranteed income to cover essentials) and invest the rest in a living annuity (for growth and flexibility).

Common RA Mistakes to Avoid

1. Choosing the Wrong Type of RA

Avoid old-style insurance RAs with high fees, upfront commissions, and penalties for stopping contributions. Modern unit trust RAs on LISP platforms offer flexibility, lower fees, and no recoupment periods.

2. Not Contributing Consistently

The power of compounding requires time. Contributing R5,000 per month from age 30 to 60 will vastly outperform starting at age 45, even if you contribute twice as much.

3. Paying Too Much in Fees

A 2% annual fee might not sound like much, but over 30 years it can consume 30-40% of your final retirement value. Choose low-cost index funds and keep total costs (including platform, fund, and advice fees) below 1% if possible.

4. Over-Contributing Beyond Your Means

While maximizing tax benefits is smart, don’t lock away money you’ll desperately need in a few years. Maintain an emergency fund (6-12 months of expenses) in accessible accounts before aggressively funding your RA.

5. Choosing Investments That Are Too Conservative

If you’re 30 years old and investing your RA in a money market fund or conservative balanced fund, you’re sacrificing decades of equity growth for unnecessary safety. Match your investment risk to your time horizon.

6. Trying to Time the Market

Don’t stop contributing to your RA because “markets are too high” or try to time when to make contributions based on market levels. Consistent contributions through all market conditions deliver the best long-term results.

RA vs TFSA: Should You Choose One or Both?

This is a common question, especially for younger investors. Here’s how to think about it:

Choose RA if:

• You’re in a high tax bracket (31% or above)
• You want forced long-term savings
• You’re self-employed without a pension fund
• You won’t need the money until retirement

Choose TFSA if:

• You’re young and in a low tax bracket
• You want flexibility to access funds before retirement
• You’re already maxing out your RA contribution
• You want to hold more than 45% offshore (no Regulation 28)

The ideal solution? Both.

For self-employed individuals earning decent income:

1. Contribute 15-27.5% of income to your RA (get that tax deduction)
2. Max out your TFSA at R36,000 per year (R3,000 per month)
3. Any additional savings goes into taxable investment accounts

This gives you tax-deferred growth in your RA, tax-free growth in your TFSA, and some liquidity in taxable accounts.

Practical Steps to Start Your RA Journey

Ready to open an RA? Here’s your action plan:

Step 1: Choose a Platform

Select a reputable, low-cost platform like:

• 10X Investments (known for ultra-low fees)
• Allan Gray
• Satrix (through financial advisors)
• Sygnia
• Old Mutual, Sanlam, Discovery (bigger institutions with broader services)

Step 2: Decide on Your Contribution Amount

Calculate what you can realistically afford, aiming for 15-27.5% of income if you’re self-employed. Start with whatever you can manage – even R1,000 per month is better than nothing.

Step 3: Select Your Investment Strategy

Choose funds based on your age and risk tolerance. When in doubt, a simple three-fund portfolio of local equity, international equity, and bonds works brilliantly.

Step 4: Set Up Debit Orders or Plan Lump-Sum Contributions

Automate your contributions if you have regular income, or schedule quarterly/annual lump sums if your income is irregular.

Step 5: Claim Your Tax Deduction

Keep records of all RA contributions. When you file your annual tax return, claim the deduction. If you’re employed, you can also adjust your tax directive to reduce monthly PAYE based on your RA contributions.

Step 6: Review Annually and Rebalance

Once a year, check your RA performance, rebalance if your asset allocation has drifted significantly, and increase contributions if your income has grown.

The Bottom Line: RAs and the Boring Investment Philosophy

Retirement Annuities are boring. There’s no excitement, no get-rich-quick potential, no hot tips or market timing involved.

And that’s exactly why they work.

RAs reward consistency, patience, and discipline. They benefit from:

• Tax benefits that give you a head start
• Forced savings that protect you from yourself
• Long time horizons that let compound growth work its magic
• Diversification that smooths returns over decades
• Low costs (if you choose wisely) that preserve more of your returns

For self-employed individuals especially, an RA is your pension fund substitute. Without an employer contributing on your behalf, it’s up to you to prioritize retirement savings.

The math is simple: if you consistently contribute 20-27.5% of your income to a low-cost, diversified RA from your 30s through your 50s, you will build substantial retirement capital. Combined with the 27.5% tax deduction, tax-free growth, and decades of compounding, the results can be truly life-changing.

Start small if you must, but start today. Your 65-year-old self will thank you.

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Remember: This article is for educational purposes only and should not be considered financial advice. Retirement planning is complex and highly personal. Consider consulting with a qualified financial advisor who can assess your specific circumstances and create a tailored retirement strategy.