Black sheep or magic wand?

By Deidré Valentine


Consider the facts about retirement annuities, not the popular narrative

Now that the “58 days of January” has come to an end and as we enter the last month of the tax year, it is time to get your tax affairs in order. It is the time of the year where you have a conversation with your accountant to see what your payable tax for the year is going to be and whether it would be worth it to contribute towards your retirement annuity (RA) to reduce the tax burden a bit.

What makes the decision more difficult, is the negative publicity around RA’s over the past few years, as Regulation 28 limits investors to 30% offshore exposure and 75% exposure towards equities. What makes things even more difficult is that offshore investments, especially American equities and more specifically the stocks of technology companies, has significantly outperformed South African equities over the past 10 years.

The above mentioned is the popular narrative, but our own experience (the facts), by way of a practical example over the past three years, proves otherwise.

An example: RA contributions

In my example, I refer to an actual case, Mr. A, who falls within the 45%-marginal tax bracket. The maximum deductible RA-contribution someone can make in the tax year is 27.5% of your taxable income, limited to R350 000 per annum, or roughly R29 000 per month.

  • Scenario 1 is where you contribute the R29 000 towards an RA and it is indicated on your payslip so that you pay less income tax on a monthly basis (this is what Mr. A did).
  • Scenario 2 is where you make no contribution towards an RA, but you invest the R29 000 per month in an aggressive offshore investment (that is not subject to Regulation 28 limits). Let’s call this Mr. B.

The table below shows that you pay R11 890 less in income tax when you make the maximum contribution of R29 000 towards an RA. This is an annual income tax saving of R142 680.


Mr. A has reinvested this monthly saving of R12 000 over the past three years (01-02-2019 to 31-01-2022) as well – in a moderate aggressive unit trust investment (which is also not subject to Regulation 28). He therefore saved R41 000 per month (R29 000 of his own money, and R12 000 with the compliments of the South African Revenue Service), while the net effect on his pocket was still R29 000.

If we compare this strategy with an investor who did not make the contribution towards an RA over the past three years but rather invested the R29 000 (the maximum amount that he and Mr. A could afford) in the MSCI World Index, the end values differ as follows:

  • A’s RA investment had a 14.84% return (after fees) over the past three years, while the additional R12 000 a month saving in an aggressive unit trust investment grew by 15.29% per annum (after fees).
  • If Mr. A did not follow this strategy and contributed R29 000 per month of his after-tax salary towards an investment in the MSCI World Index, his investment would have given him a return of 19.79% (before fees) per year (in rand).


But despite the higher return for the offshore investment, the end value of the RA-strategy’s two investments together is R1.82 million while the offshore investment has an end value of R1.37 million. This is a difference of roughly R450 000 (or 33%) more in the RA strategy over a period of just three years.

A few things that need to be considered

I have to mention the following three points of concern:

  • I want to highlight the fact that this RA strategy is only successful if you get the saving in income tax monthly instead of annually and you reinvest it immediately. If you receive the tax credit annually, you will also have a big advantage, but not as big as when you receive it monthly. In practice, most investors don’t reinvest the tax credit but rather “enjoy” it.
  • A is one of the few “lucky ones” who fall within the 45% tax bracket and the effect of this strategy is significantly less dramatic at a lower income tax bracket. The advantage is however still significant and makes it difficult, or rather, close to impossible for other strategies to outperform this one over time.
  • The income from RA’s is fully taxable post-retirement while income from unit trust investments have mostly just capital gains tax implications. To do your retirement planning by investing only in RA’s is not tax-efficient and is, for several reasons, not the wisest thing to do.

Even though the geographical limits of Regulation 28 have disadvantaged investors, especially between 2015 and 2020, we are of the opinion that it might not necessarily be the case over the next few years.

In circumstances where you can possibly achieve similar returns from alternative after-tax investments and the playing fields are similar, the same strategies as mentioned above, on an average return of 10% per annum (for both strategies), would lead to a 41% larger end value for the RA strategy compared to the alternative strategy.

In summary

The advice to stop your RA’s, is in our opinion simply wrong and is not supported by evidence. If you find yourself in a high tax bracket and you are not planning to emigrate any time soon, you are putting yourself at a disadvantage by not considering this investment vehicle and the strategy mentioned above. RA’s give you the opportunity to give SARS a legitimate punch in the gut. We say: Do it!

Deidré Valentine is a certified financial planner at Woodland Wealth (previously known as ProVérte Wealth & Risk Management). Contact her at

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.

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