Tax-free investments: Do Retirement Annuities make financial sense?

Wondering whether to save through an investment product called a Retirement Annuity (RA), which offers a tax deduction? Popular Biznewz blogger Enrico Liebenberg has crunched some numbers with a view to figuring out whether an RA is a good place to park your money.

He looks at the types of returns you can expect from an investment housed in an RA compared to how your money might fare in a unit trust fund. Enrico also highlights some of the other factors you need to think about when deciding whether an RA is right for you, such as preservation of capital and beating inflation.

He comes to the conclusion that RAs are worth considering, although he still prefers the freedom that comes with other types of investment options. And he reminds us that, although RAs have tax perks when you put your money into them, you will pay tax later. 

‘Not only is the RA income taxable, but the investment you made with the taxed money is taxable on the growth earned on the cash invested,’ says Enrico. So, don’t fall for the tax-free investing hype – have a thorough look at all the money angles before you set your money aside in an RA, is the main message here. – JC

By Enrico Liebenberg 

To pay taxes, or not to pay taxes, that is the question.

When meeting with a financial advisor about retirement planning and investments, they almost always play the “Remember the retirement annuity, tax deduction…” with great reasoning of course. I have to agree: this is one of the things government is getting right to some extent. Allowing the taxpayer – you and I – to deduct a portion of the retirement annuity (RA) contributions from taxable income, is an incentive to save. Something our awesome nation seems not to be doing as often as one would like.

Although you qualify for a tax deduction – you have to assess whether the deduction will benefit your investment goals and strategy. For the sake of the argument let us assume that the sole investment goal and strategy meets the following:

  • Preserve capital
  • Beat inflation
  • Save enough to replace your salary when retiring at 65 – I work with 65, as this is the age the tax act is based on as a retirement age.

Just some quick background to RAs and rules regulating it. The Pensions Fund Act stipulates that

Enrico Liebenberg has a knack with numbers. In his latest blog he demonstrates how we should size up Retirement Annuities to see whether they make sense.
Enrico Liebenberg has a knack with numbers. In his latest blog he demonstrates how we should size up Retirement Annuities to see whether they make sense.

under regulation 28, you will hear this countless time when dealing with RAs, that the investor is limited to the following exposure in each asset class:


Asset type  Maximum exposure
Equities (excluding listed property)  75%
Offshore assets  25%
Listed property  25%
Commodities  10%
Hedge funds  10%
Bank debt  75%
Government debt  100%
Cash  100%

I did some number-crunching to decide for myself if I would invest through an RA or with taxed money. I worked with the following parameters:

  • Gross monthly cost to company remuneration, all in cash, R20 000
  • Annual inflation of 8% (I feel this is more realistic over the long run)
  • Investment horizon of 36 years, before retirement.
  • For the sake of the exercise I selected the following portfolio, from the Coronation retirement annuity products:


Contribution split Life time performance Benchmark
BALANCED PLUS 25.00% 16.70% 14.30%
CAPITAL PLUS 50.00% 14.60% 10.20%
INDUSTRIAL 25.00% 20.20% 16.30%
  • This portfolio enjoys the following exposure:
  • 73.75% Equity
  • 18.75% International
  • 18.75% Property
  • Increase monthly contributions with 8% annually for up to 10 years, after that the contribution will become unaffordable.
  • The idea was to have the same amount of cash available to spend each month after making the investment.
    • Saving with an RA – you can afford to start saving with R 2 437.50 per month
    • Saving with taxed money – you can start saving with R 2 000.00 per month

All the information was just to give you some background on how the comparison was made. Saving with the RA you would have accumulated just over R119 000 000, in today’s terms about R7 500 000. Should you have opted saving with taxed money, you would have accumulated just over R98 000 000, in today’s terms about R6 100 000. Now you have to remember, the annuity payable from the RA at retirement is now taxed, the reason being the contributions were tax-deductible.

The idiom, the only certainties in life is death and taxes – rings true. We should maybe add inflation to that. Not only is the RA income taxable, but the investment you made with the taxed money is taxable on the growth earned on the cash invested.

After all the number crunching and considering all the results, it seems there is no difference really if you save with a deferred tax approach or decide to pay tax man now. I however like the freedom of investing with taxed cash, but will build in an RA factor to my portfolio.

So am I any wiser after spending all the time crunching these numbers? For sure – the earlier you start investing, the better. You will at least be somewhere down the line to ensure comfortable retirement, whether with an RA or saving after having paid your dues to government.

Also by Enrico Liebenberg on How to grow rich as a salaried employee: It’s possible if you follow some basic disciplines

* Enrico Liebenberg is Financial Manager at one of the country’s largest sporting and hunting goods retailers and is based at their head office in Stellenbosch.  Apart from his passion for investments and wine-making and -appreciation, Enrico takes a very keen interest in picking winning investment portfolios. To keep body and soul balanced, Enrico loves a round of golf, follows professional cycling and relaxing with his wife, but not necessarily in that order of importance. When not in the office you will most likely find him at his favourite local pizza spot enjoying the odd pizza and an ice cold brew or two.