RETIREMENT ANNUITY

A Retirement Annuity should follow your retirement date - not a generic contribution.

A Retirement Annuity is one of the main vehicles South Africans use to save for retirement outside a workplace fund. It rewards discipline with a tax deduction today and preserves the investment until retirement - but only once its rules, limits and tax treatment are properly understood.

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Overview

Structure contributions around the outcome you actually need at retirement.

We look at your current tax position, your existing retirement savings, the investment term available to you and Regulation 28 requirements together, so the Retirement Annuity you hold is sized and invested for the retirement date you are working towards - not just for this year's tax deduction.

What a Retirement Annuity is, and what it is not

A Retirement Annuity is a long-term investment product regulated under the Pension Funds Act 24 of 1956, designed specifically to build up capital for retirement. Contributions are invested by a licensed administrator on the member's behalf, and the underlying investment portfolio must comply with the prudential investment limits set out in Regulation 28 of the Act.

A Retirement Annuity is not a savings account and it is not a life policy in the everyday sense, even though it is often sold as one. Its defining feature is preservation: subject to limited exceptions, the invested capital cannot be accessed before age 55, and it is specifically designed to convert into a retirement income at maturity rather than a lump sum to be spent freely.

The tax deduction under section 11F

Section 11F of the Income Tax Act 58 of 1962 allows a taxpayer to deduct retirement fund contributions - to a pension fund, provident fund and retirement annuity fund combined - up to 27.5% of the greater of remuneration or taxable income, capped at an annual rand amount that is adjusted from time to time by the Minister of Finance in the annual Budget.

Two details are frequently missed. First, the 27.5% limit applies across all retirement funds a person contributes to, not per fund - so a Retirement Annuity contribution is added to any pension or provident fund contribution made through an employer before the limit is tested. Second, a contribution above the limit is not lost: it is carried forward and may be deducted in a future tax year, or used to reduce the taxable portion of a retirement lump sum or annuity income later.

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Regulation 28: how the money may be invested

Regulation 28 of the Pension Funds Act limits the proportion of a retirement fund's assets that may be held in particular asset classes - for example, a maximum exposure to equities, to property, and to assets outside South Africa. The intent is to protect retirement savings from excessive concentration in any single asset class or market.

Because Regulation 28 is a limit on the fund as a whole, the underlying portfolio a member selects within their Retirement Annuity must still fit inside it. A portfolio that looks appropriate in isolation can still breach the regulation once combined with the fund's other assets, which is why the compliance of a fund-level portfolio - not just the fund's marketing material - is the detail worth confirming before a contribution is made.

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The two-pot retirement system

Since 1 September 2024, retirement contributions to a Retirement Annuity (and to pension and provident funds) are split into a savings component and a retirement component. One-third of new contributions go to the savings component, which can be accessed once per tax year before retirement, subject to tax at marginal rates. Two-thirds go to the retirement component, which remains fully preserved until retirement and must then be used to provide a retirement income.

Retirement savings built up before 1 September 2024 - the 'vested component' - continue to be governed by the rules that applied at the time, and are not automatically moved into the new savings or retirement components. Understanding which component a given Rand sits in matters, because each component is accessed differently and taxed differently.

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What happens at retirement

At retirement (from age 55), the vested, savings and retirement components are treated separately. The retirement component is generally preserved for the purchase of a retirement income. The savings component may generally be taken as a cash lump sum or used to buy retirement income, while the vested component remains subject to the rules that applied before 1 September 2024. It is therefore incorrect to treat one-third of the retirement component as the standard cash entitlement.

The available lump sum, applicable tax table and annuitisation requirement depend on the component, the fund rules and any legislated small-benefit exception. These details should be confirmed against the current rules and the member's benefit statement before retirement instructions are made.

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Read our Living Annuity guide
Key considerations

What to weigh up before you commit.

Contribution limit

Section 11F's 27.5% deduction limit applies across every retirement fund you contribute to, not per fund, so a Retirement Annuity contribution must be sized against what an employer fund already uses.

Regulation 28 compliance

The underlying investment portfolio must sit within Regulation 28's asset-class limits at the fund level, not only look reasonable in isolation.

Preservation until 55

Capital is locked in until retirement age, subject only to the two-pot savings component and narrow legislated exceptions.

Two-pot components

New contributions split into a savings component and a retirement component, each accessed and taxed differently, alongside any pre-September-2024 vested savings.

Retirement lump sum tax

The available lump sum and tax treatment depend on whether the benefit is in the vested, savings or retirement component, as well as the retirement lump sum tax tables in force at the time.

What happens with the balance

The retirement component generally buys retirement income, while the vested and savings components have their own retirement treatment. Confirm the fund rules before choosing a Living or guaranteed annuity.

Questions

Retirement Annuity questions, answered clearly.

What is a Retirement Annuity?

A Retirement Annuity is a long-term investment product regulated under the Pension Funds Act, used to save for retirement outside a workplace fund. Contributions are invested subject to Regulation 28's asset-class limits, and the capital is preserved until at least age 55.

How much of my Retirement Annuity contribution is tax deductible?

Section 11F of the Income Tax Act allows a deduction of up to 27.5% of the greater of remuneration or taxable income, across all retirement fund contributions combined (pension, provident and retirement annuity funds), subject to an annual rand cap set in the Budget. Contributions above the limit carry forward to future tax years.

Can I access my Retirement Annuity before retirement?

Generally no. Since the two-pot system began on 1 September 2024, one-third of new contributions form a savings component that can be accessed once per tax year, taxed at your marginal rate. The retirement component, and any pre-September-2024 vested savings, remain preserved until at least age 55.

What happens to my Retirement Annuity at retirement?

From age 55, the vested, savings and retirement components are treated separately. The retirement component generally buys retirement income; the savings component may generally be taken as cash or used for income; and the vested component follows the pre-1 September 2024 rules. The precise lump sum, tax and annuitisation outcome must be checked against the fund rules and current legislation.

What is Regulation 28 and why does it matter?

Regulation 28 of the Pension Funds Act limits how much of a retirement fund's assets may sit in particular asset classes, such as equities, property and offshore assets. It exists to protect retirement savings from excessive concentration risk, and applies at the fund level to the portfolio a member selects.

Is a Retirement Annuity the same as a pension fund?

No. A pension or provident fund is typically employer-sponsored and governed by its own rules; a Retirement Annuity is a fund a person joins independently of an employer. Both are retirement funds under the Pension Funds Act and share the section 11F deduction limit and Regulation 28 investment limits.