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The tax advantages of formal retirement savings are worth exploiting

Be cautious around advice suggesting cashing in formal retirement savings and investing outside the formal retirement savings system: Alexander Forbes.
Government has provided incentives to encourage saving for retirement, but it appears that some savers don’t fully understand and make use of the tax benefits. Image: Shutterstock

Government provides a means-tested old age pension benefit primarily targeting the most vulnerable individuals in society. The current benefit is a pension of up to R1 860 per month from age 60 years and up to R1 880 per month from age 75 years – on condition that you don’t earn more or have assets more than specified amounts.

For most working South Africans, formal retirement savings vehicles are therefore their only source of retirement income.

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However, insights from the Alexander Forbes Member WatchTM show that the current retirement savings environment is characterised by low contributions, a culture of low preservation rates and a significant proportion of the working population not making provision for retirement.

On average, 8% of people retire comfortably.

This is despite South Africa’s real returns being one of the highest in the world over the last 120 years. The reasons for this include the fact that 33% of people don’t make provision for retirement and, where they do, less than 10% preserve their retirement savings when leaving jobs throughout their working career.


To assist in improving this outcome, the government has provided tax incentives to encourage saving for retirement. However, it appears that some savers don’t fully understand and make use of the tax benefits.

Investors may think they are getting the best possible retirement outcome by investing in discretionary savings vehicles that offer more investment flexibility, but these may not produce the best results in terms of asset accumulation over their working lifetime and providing an income into retirement. This is because formal retirement savings vehicles have significant tax advantages to assist in maximising the accumulation of capital and in providing an income in retirement.

The relatively flexible nature of discretionary savings vehicles may seem less restrictive and attractive, but the ‘retirement’ outcomes they ultimately deliver are likely to be misaligned to your desired retirement goal expectations.

Discretionary savings vehicles do serve a purpose and offer solutions to a myriad of investor needs, but they are in most instances sub-optimal solutions for purposes of maximising the full potential of your retirement funding outcomes.

Tax exemptions

The government offers South Africans tax exemptions where savings and investments are retained within a contractual savings vehicle targeting a retirement outcome, such as an employer-sponsored pension fund, provident fund or retirement annuity.

The tax incentives offered up include no tax on interest, no capital gains tax, no dividend-withholding tax, no estate duties, and tax-free lump sum concessions at retirement.

Furthermore, contributions to these contractual savings vehicles are tax deductible, lowering investors’ taxable income. These are considerable and noteworthy incentives that the government has provided.

Government is looking to put the right frameworks in place to improve the country’s retirement safety nets. In exchange for these incentives, the framework also encompasses oversight bodies and an array of supplementary prudential protections, such as Regulation 28, that are rooted in ensuring diversified investments aimed at meeting rand-based retirement income liabilities, as well as fostering responsible investment practices and sustainable retirement outcomes.

Offshore allocations

Regarding the debate around offshore allocations, increasing Regulation 28-compliant funds’ offshore exposure outside South Africa from the current 30% all the way to 100% is not the most prudent retirement strategy for the vast majority of South Africans.

Most South Africans’ liabilities such as school fees, bonds and food expenses are in South Africa and for these, having a greater allocation to South African assets makes sense.

Offshore allocations are necessary and do provide diversification benefits to improve the likelihood of meeting retirement income goals and in managing risks.

In addition, the most optimal allocation depends on the individual circumstances and risk appetite. Hence, additional flexibility around the current prudential offshore limits would be welcomed to improve outcomes.

However, it is understandable that this needs to be balanced against the other goals the regulations are looking to achieve – especially as these restrictions are a condition of the significant tax benefits provided.

For investors currently looking to unshackle themselves from the prudential investment limits prescribed under Regulation 28, an entry into discretionary savings vehicles to achieve retirement objectives may not be justifiable in most instances.

Discretionary growth portfolios with greater flexibility to invest 100% offshore rarely beat Regulation 28 funds in rand terms in the long run once tax effects are considered.

Formal retirement savings vs discretionary savings vehicles

In order to compare formal retirement savings and discretionary savings vehicles, Alexander Forbes modelled the outcomes over a 35-year period using a range of asset class assumptions, tax assumptions and taxable income levels. The modelling also looked at various scenarios where offshore returns are expected to be higher than local returns and vice versa.

Comparing retirement outcomes between formal retirement savings vehicles and discretionary savings, the tax benefits realised from formal retirement savings vehicles result in accumulated capital being significantly greater.

The after-tax lump sums and income at retirement was shown to be between 35% and 70% higher when making use of a retirement savings vehicle in the base case scenario.

As well as the initial income being better, the income in retirement is also expected to last longer using formal retirement savings vehicles. Retirement outcomes under a formal retirement savings vehicle continued to outperform those achieved under discretionary savings vehicles – even in the modelled scenarios where local equities disappoint and offshore returns do well.

The case for matching formal retirement savings vehicles with the objective of saving for a retirement income is extremely strong. The best advice for meeting retirement objectives with the highest likelihood is to save for retirement through formal retirement savings vehicles (despite the restrictions in relation to Regulation 28).

Additional and gradual flexibility of Regulation 28 would be welcome and would improve the outcomes further.

Any advice suggesting that individuals should cash in their formal retirement savings, pay tax, and then invest the proceeds outside the formal retirement savings system (in, for example, offshore schemes) should be treated with extreme caution.

John Anderson is executive of investments, products and enablement at Alexander Forbes.


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“On average, 8% of people retire comfortably.” Since average life expectancy in SA is 63.5 years the average South African is dead at normal retirement age.

How about this:
Do not contribute to any pension fund.
Pay your tax, take the rest of the money and invest it in stocks / unit trusts (no reg.28 limits).
Of course you’ll use a good financial advisor.
Stay away from policy hawkers.
When you retire you’ll pay less tax, dividend tax and CGT are much less than income tax.
That means their “drawdown” on their retirement investment is much smaller than it would be in the case of a living annuity.
In the long run you’ll be better off. And no, long run is not 5 years!
Can you use excel? Go figure.
BTW why don’t you hear advisers recommending retail bonds to their clients? Just asking.

Been doing it myself for years and been getting better returns than the “professionals”

Knowing that the industry is driven by fees and commissions puts everything into a new perspective.

“…no advisors recommending Retail Bonds to their clients?”

Well, how much COMMISSION will they get from advising you? Probably none.

I haven’t seen any fin.advisor jumping for joy, when they’re asked about interest-bearing investments, like money-market, FD or call accounts 😉

No commission = no advice.


And bear in mind, instead of taking most of the CGT tax pain at the end (i.e. come withdrawal time, to live off your capital) can be minimized by utilising your annual R40K CGT exemption to best effect, by constantly switching underlying funds.

i.e. take cyclical profit on some funds that did well, lock in your gains & switch out. Hence you ‘re-set’ the CGT base cost, by moving into a new underlying fund within the same asset manager.

(…and taking advantage of such annual CGT exemption you CANNOT do if you invested in a rental-property instead. SARS will hit you hard on CGT when you later sell a non-primary residence, as you cannot sell and buy-back again pieces of your property-deed over the period of ownership. With shares/UT/ETF’s you can do exactly that & mitigate CGT).

Good morning, have also decided to reduce my RA contributions and invest more into ETF,s- found you comments interesting-could you explain more regarding the switching to reset the CGT please?

I forgot to add:
a friend did this.
We compared his statements with his compulsory work pension fund statements. Ie the net values
His growth outperformed his “tax benefits”, after costs for both.

My wife left her pension in a Alexander Forbes “preservation fund” and lived in the UK for 8 years. Coming back the “advice fees” from a company which hadn’t contacted her once, admin fees and various other costs combined with mediocre performance was a harsh lesson in Alexander Forbes’ priorities. Not he advocates based on the tax benefits (which the govt provides) and not on the Alexander Forbes benefits.

Dear Sir, did you also tabulate what the total fees paid to advisors and administrators and fund managers were over the 35 years?

Compound income is a miracle but compound expenses is a bitch with a rash and rabies.

Yes, you CAN EXPLOIT the tax advantages of RA Funds, of which there are many positives.

But don’t complain if someday into the future, our heavily indebted Govt starts to EXPLOIT your and my RA Funds via ‘prescribed assets’!

I may work both ways 🙁

“In order to compare formal retirement savings and discretionary savings vehicles, Alexander Forbes modelled the outcomes over a 35-year period using a range of asset class assumptions, tax assumptions and taxable income levels.”

If you retire today the last 8 years has been disappointing:

1. 91 Managed Fund (Reg28) – growth = 134%
2. 91 Global Franchise Feeder Fund – growth = 307%

Your pension will be 130% lower. Also Reg28 funds are invested too conservatively when risk tolerance is high.

End of comments.





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