Retirement Annuities (RA) Explained: Tax Benefits and Pitfalls

In the corridors of financial power in Sandton, the Retirement Annuity (RA) is a polarizing topic. For some, it is the holy grail of tax efficiency—a government-approved method to slash your tax bill while building wealth. For others, it is a “trap”—a product laden with hidden fees, restrictive rules, and poor performance that locks your money away until you are old and gray.

Who is right?

As is often the case in finance, the answer lies in the nuance. The RA of 2026 is not the same beast as the RA your parents bought in 1990. The industry has been disrupted, fees have plummeted, and legislation has evolved. Yet, the core trade-off remains: You give up liquidity (access) in exchange for massive tax breaks.

If you are a high-income earner in South Africa, ignoring an RA is mathematically expensive. You are effectively donating money to the South African Revenue Service (SARS) that could have been compounding in your own pocket. However, if you choose the wrong provider or fund, the fees will eat that tax benefit for lunch.

In this definitive guide, we will strip away the jargon. We will analyze the Retirement Annuity (RA) from every angle: the unbeatable tax deductions, the frustration of Regulation 28, the new “Two-Pot” system, and how to spot a “Legacy RA” that is destroying your wealth.

To understand how retirement planning fits into your complete portfolio, I strongly recommend you read our foundational pillar: The Ultimate Guide to Investing in South Africa.

What Exactly is a Retirement Annuity?

Let’s clarify the definition. An RA is not a specific asset class like “gold” or “property.” It is a tax wrapper. Think of it as a container. Inside this container, you can hold Unit Trusts, ETFs, cash, or bonds. The government created this container to stop you from being a burden on the state when you retire. To bribe you into locking your money away, they offer you the most generous tax incentive in the Income Tax Act.

The Three Golden Rules of the RA:

1. You cannot touch the money until age 55 (except under specific conditions like emigration or disability).
2. You cannot hold 100% offshore assets (Regulation 28 applies).
3. You get a massive tax refund on your contributions.

The Carrot: The Tax Deduction

This is the primary reason—and often the only reason—to invest in a Retirement Annuity (RA). Section 11F of the Income Tax Act allows you to deduct your RA contributions from your taxable income.

The Limits: You can deduct 27.5% of your taxable income (or remuneration, whichever is higher), capped at an annual limit of R350,000.

The Real-World Math: Let’s assume you earn R600,000 per year. You fall into a marginal tax bracket of roughly 36-39%.

• If you contribute R5,000 per month (R60,000 per year) to an RA.
• SARS views your income not as R600,000, but as R540,000.
• Because you already paid PAYE (Pay As You Earn) on the full R600,000 throughout the year, SARS owes you money back.
• When you file your tax return, SARS will refund you approximately R21,000 to R23,000.

The Compounding Effect: If you take that R21,000 refund and reinvest it back into your RA (or a Tax-Free Savings Account), you create a “double compounding” effect. You are earning growth on money that would have otherwise gone to the government. Over 20 years, this tax-funded boost is mathematically powerful enough to outperform almost any standard discretionary investment.

The Stick: Regulation 28

This is the most common complaint I hear from my clients: “Johan, I don’t want to invest in South Africa. The economy is stagnant. Why must my RA be stuck here?”

This is the downside of the deal. To get the tax break, you must comply with Regulation 28 of the Pension Funds Act. This regulation limits where your money can be invested to protect you from “risk” (according to the government).

The Current Limits (as of 2026):

• Max 75% in Equities (Shares).
• Max 45% in Offshore Assets (Global Markets).
• Max 25% in Property.
• Max 10% in Hedge Funds/Private Equity.

The Reality Check: Critics hate the 45% offshore cap. They argue that you miss out on the growth of the S&P 500. While valid, remember that 45% is significantly better than the old limit (which was 30%). A portfolio with 45% global exposure and 55% local exposure (including high-dividend SA shares) is actually a very balanced, robust portfolio. It is not a death sentence for returns; it is a forced diversification.

The Evolution: The “Two-Pot” System

We cannot discuss Retirement Annuities (RA) without addressing the elephant in the room: the Two-Pot Retirement System implemented recently. This changed the “lock-in” rule significantly.

How it works: Your contributions are now split into two “pots”:

1. The Savings Pot (One-Third): You can access this money before retirement (once a year, minimum R2,000 withdrawal). It is taxed at your marginal rate.
2. The Retirement Pot (Two-Thirds): This remains locked until age 55 and must be used to purchase an annuity (pension) at retirement.

The Analyst Warning: Just because you can access the Savings Pot does not mean you should. If you raid your Savings Pot every year to pay for a holiday or car service, you are destroying your compound interest. You are also paying punitive taxes on the withdrawal. Treat the Savings Pot as a “break glass in case of emergency” fund, not a transactional account.

Legacy RAs vs. New Generation RAs

This is where millions of South Africans are getting ripped off. If you opened an RA before 2010 (or even recently with certain insurers), you likely have a “Legacy RA.”

Signs you have a Legacy RA:

• Upfront Commission: Your broker took a massive chunk of your year 1 contributions.
• Penalties: If you stop paying or move the RA to another provider, they charge you a “termination penalty” or “adjustment fee” of up to 15% of your capital.
• High Fees: Total Investment Charges (TIC) of 2.5% or 3% per year.

The New Generation (LISP) RA: Modern platforms like Sygnia, 10X Investments, and EasyEquities offer “Unit Trust RAs.”

• No Penalties: You can stop contributing anytime. You can move anytime.
• Low Fees: Total costs are often under 1%.
• Transparency: You can see exactly what ETFs you hold.

Johan’s Advice: Check your RA statement today. Look for the “EAC” (Effective Annual Cost). If it is above 1.5%, you are paying too much. Consider doing a Section 14 Transfer to move your funds to a cheaper, modern provider. The long-term difference in wealth is staggering.

The Exit Strategy: What Happens at 55?

When you turn 55, the RA matures. You have a choice to make. You cannot just take all the cash (unless the total value is under R247,500).

The 1/3 vs. 2/3 Rule:

• One-Third: You can take as a lump sum cash payout.
  • Tax: The first R550,000 is tax-free (lifetime limit). The rest is taxed on a sliding scale.
• Two-Thirds: Must be used to buy a “Compulsory Annuity” (a monthly pension).

Types of Annuities:

1. Living Annuity: You invest the money in the market and choose how much to withdraw (between 2.5% and 17.5% per year). If the market crashes, your income drops. Your heirs inherit the capital.
2. Guaranteed Life Annuity: You give the capital to an insurer (like Old Mutual or Sanlam). They guarantee to pay you a set monthly amount until you die. It is safe, but inflation can erode it, and usually, no capital is left for heirs.

Who Should (and Shouldn’t) Get an RA?

Yes, get an RA if:

• You are a high earner (tax bracket 30%+). The tax deduction is free money.
• You struggle with discipline. The “lock-in” forces you to save.
• You run your own business and have no corporate pension fund.

No, avoid an RA if:

• You earn below the tax threshold. There is no tax benefit to claim.
• You plan to emigrate soon. Accessing RA funds upon emigration involves a complex tax clearance process with SARS (3-year lock rule for non-residents).
• You need liquidity for a house deposit or business startup in the next 5 years. Use a discretionary investment instead.

The Taxman Gives You a Gift

There are very few “free lunches” in finance. The Retirement Annuity (RA) tax deduction is one of them. Yes, Regulation 28 is annoying. Yes, locking your money away is scary. But the mathematics of an immediate 30-45% return (in the form of a tax refund) is unbeatable.

If you optimize your RA by choosing a low-cost, modern provider and maximizing your offshore exposure to the 45% limit, it becomes a potent weapon in your arsenal. It should not be your only investment, but for any working professional, it should be a cornerstone.

Don’t let the bitterness of old-school insurance products blind you to the efficiency of the modern structure. Claim your deduction. Compound your refund. Retire with dignity.

Your Next Step: Log into your SARS eFiling profile to check your “Unused Pension Fund Contributions” carried forward. Then, compare your current RA’s Effective Annual Cost (EAC) against a low-cost provider like 10X or Sygnia. If you are paying over 2%, initiate a Section 14 transfer today.