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RA top up or tax-free savings account?

Should I use the RA tax benefit, as allowed by Sars, before investing into a tax-free fund?

I am currently 54 years old and contributing to a pension fund and RA. I am also contributing towards a tax-free fund of R33 000 per year. I am however not using the full 27.5% contribution towards the pension/RA funds on my total remuneration as per Sars. My question: Would it be better to first use the tax benefit as allowed by Sars before investing into a tax-free fund? Financially I am not able to contribute the full 27.5% plus the R33 000.


Peter Nurcombe-Thorne - Rosebank Wealth Group (Pty) Ltd


Dear Reader

Without fully understanding your personal circumstances, it would be difficult to give a definitive answer to your question. We would need a more complete understanding of your current situation; what the long-term requirements would be and more specific information such as income earned, tax paid, time until retirement and amounts currently contributed to the pension plan and retirement annuity.

I am assuming that the pension fund is an employer scheme and that you would like to understand whether it would be preferable to top up your RA or invest in a tax-free savings account. I will explain the main characteristics of the two products and then make some broad suggestions as to how to choose between the two.

Pertinent facts about retirement annuities

1)    Contributions are tax deductible – this effectively means that for a 30% taxpayer for every R700 contributed R1 000 will be invested.

2)     No taxation on the growth of your investment. Most investments are subject to capital gains tax, income tax and dividend tax. Within a retirement annuity no taxes are paid therefore increasing your returns through the tax saving.

3)     You will only have access to your retirement annuity benefits from the age of 55.

4)     Retirement annuity investments need to comply with certain legal investment limits which fall under Regulation 28 of the Pensions Fund Act. This limits the amount of equity and currently limits offshore exposure to 30% of the value of your RA portfolio.

5)     When you retire you can take up to one third of your RA as a lump sum (or all of it if it’s worth less than R247 500). The first R500 000 that you take as a lump sum is not taxed, however anything above this amount is subject to tax at the current rates applicable.

6)     When you retire the two-thirds amount must be transferred to a product that can provide you with income and payments made will be subject to income tax. These would include living annuities and guaranteed annuity products. You will not have unfettered access to these funds after retirement.

7)     Upon death, the undrawn portion of the living annuity will fall outside of your estate and therefore attract no estate duty.

Pertinent facts about-tax free savings accounts

 1)     As per the retirement annuity there is no taxation on the growth of your investment, unlike most other investments which are subject to capital gains tax, income tax and dividend tax. Within a tax-free savings account no taxes are paid therefore increasing your returns.

2)     A tax-free savings account is limited to a maximum of R33 000 per calendar year and a lifetime limit of R500 000.

3)     Unlike a retirement annuity the full proceeds are available as a tax-free amount.

4)     There are no asset class limits or offshore limits in tax-free savings accounts.

5)      Proceeds can be accessed at anytime.

6)      Upon death, any undrawn savings will fall into your estate and will therefore be liable for estate    duty.

7)     Contributions to these funds are made from after tax funds and therefore you do not receive a tax benefit for investing.


1)      Both a retirement annuity and a tax-free savings account offer clients an effective way of saving for the future. They are extremely tax efficient, have a number of investment options and should both be considered in any client’s portfolio.

2)       The important differences between the two products are the following:

  • A top up of your RA contribution is tax deductible, while the tax-free savings account contribution is made with after-tax money. 
  • Secondly, your RA investment can only be accessed when you reach 55 with the conditions mentioned above, while the tax-free savings account investment can be sold at any time if you need to cash it in.
  • Thirdly you have greater investment freedom with a tax-free savings account than you do with your RA.

3)     In choosing one savings vehicle above the other, you must evaluate the degree to which you value the flexibility of the tax-free savings account versus the higher level of pre-tax saving offered by the RA.

I hope you find this useful and I would recommend engaging with your financial planner to decide where your funds would be best invested to give you the optimal solution for your personal set of circumstances.






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