Retirement Annuities a Powerful Tool for Building Long-Term Wealth.

5 Mar 2026 | Investment Planning Post

Retirement Annuities: a Powerful Tool for Building Long-Term Wealth.

A retirement annuity (RA) can be one of the most powerful wealth-building tools you can use in your investment plan. Still, many people avoid RAs because of the bad reputation that older “legacy” products earned over the years: high fees, poor transparency, poor returns and harsh penalties for moving the investment or stopping/changing contributions. The good news is that most of those problems are no longer features of modern, platform-based RAs. Today’s RAs are far more flexible, clearer on costs, and easier to manage, which means it’s worth taking a fresh look at how they can help you build wealth over time.

Why RAs Got a Bad Reputation

There are good reasons why many South Africans became wary of retirement annuities. A lot of the older, legacy RAs were sold more like insurance policies than straightforward investment accounts. They were often costly, difficult to understand, and not transparent about what you were paying. Because the structure was complex, it was also hard to compare one RA to another, or to compare an RA to other investment options. On top of that, investment choice was usually limited, which meant clients often had less control over where their money was invested and how much growth they could reasonably expect.

Life rarely runs exactly as planned, and older-style RAs didn’t handle that reality well. If you needed to stop contributions, reduce them, or move your RA to another provider, you often incurred penalties and fees that could take a meaningful bite out of your investment.

This history matters, because many objections’ investors have today are aimed at those older-style RAs, but the reality is that new generation retirement annuities could be an invaluable tool in building wealth over the long term. As humans our biases often comes at a cost and good advice is to know the facts and then making informed decisions.

What Has Changed

1) Costs are easier to see and compare

Modern RAs are far more transparent. The industry now uses more standardised disclosure (Effective Annual Cost (EAC)) so you can compare the total cost of different investment options more clearly. That doesn’t mean every RA is automatically cheap, fees still differ dependent on the provider and funds used, but it does mean costs are much easier to identify and question than they were in the old commission-heavy era.

2) You have access to broader investment options

Another concern often raised against RAs is the limitations in investment opportunities. The fact is that a modern RA no longer feel like a “South Africa only” product. Regulation 28 (the rule that governs what retirement funds may invest in) has evolved and RA investors can invest up to 45% of the portfolio offshore, the same as a high-equity discretionary unit trust. In addition, changes to regulation 28 now means that RA investors can also invest in alternatives such as hedge funds and private equity.  Even the equity exposure in an RA can go as high as 75% which means a well-diversified long-term growth strategy can be implemented in an RA.

3) Liquidity has improved with the Two-Pot system

Historically, one of the biggest frustrations with retirement products was access to an investor’s funds before the age of 55. Since 1 September 2024, the Two-Pot Retirement System introduced a practical compromise:

  • One-third of new retirement contributions go into a savings component which investors have access to once a year, and
  • Two-thirds go into the retirement component which is preserved for retirement.

4) The tax advantages

The tax benefits remain one of the main reason retirement annuities are valuable in long-term financial wealth creation:

  • Contributions to retirement annuities may qualify as a tax deduction. The tax benefit is however limited to 5% of the greater of remuneration or taxable income and is capped at a maximum contribution of R430,000 per tax year (across all retirement funds combined). Not only does an RA contribution reduce the marginal tax rate of the investor but it also means that the investor could potentially invest more without it having a negative effect on their disposable income.
  • The second tax benefit is derived from inside the retirement fund as any capital gain or interest earned in the retirement annuity is non-taxable.
  • Another tax benefit is at retirement where an investor can withdraw a portion of the portfolio tax free and withdraw an income at potentially lower tax rates compared to the time they were employed.

Turning the tax saving into a wealth booster

What happens when the tax saving is reinvested instead of spent?

Let’s compare four scenarios. In all four scenarios the assumptions are the same, the only difference being what the investor does with the tax saving.

Spoiler alert, the big takeaway in one line: When an RA is used and the tax saving is reinvested, this client retires with +- R 17 million more than only investing in a discretionary  investment (nominal terms).

Assume a 21-year-old client starts working now and invests until age 65. Use these modelling inputs:

  • Monthly contribution: R2,000
  • Term: 44 years
  • Nominal gross return: 11.0% p.a.
  • Inflation: 5.0% p.a.
  • Client marginal tax rate: changes over time (salary starts at R60 000 per month and does not increase*)
  • RA and linked-investment return split: 5% interest, 15% dividends, 80% capital growth
  • Same underlying portfolio and same investment fee assumption in both wrappers
  • Comparison isolates tax wrapper effect, not manager skill or fee differences

*Assumption made for calculation purposes.

For the tax inputs, this scenario uses the 2025/26 South African rules requested: the Personal Income Tax brackets; the retirement-fund deduction remains subject to the 27.5% rule and the R350,000 annual cap; the local interest exemption for a taxpayer below 65 is R23,800; dividends tax is 20%; the individual CGT annual exclusion is R40,000; and the individual inclusion rate is 40%. The 2025/26 TFSA limits are R36,000 per year and R500,000 lifetime. (Some of these tax limits have been increased in the 2026/2027 tax year which will be more beneficial compared to the ones used in the scenarios below)

Based on the assumptions mentioned , the result is straightforward: With both investment products delivering the same gross returns  and the investor making the same contribution to both, an RA investment will add  roughly 18% to the investors wealth over the investment period purely because of tax benefit.

  • RA nominal value at 65: R38 694 201.00
  • Discretionary linked value at 65, after ongoing tax and no realised CGT: R31 812 559.00

An investor using only a discretionary investment product will have to increase their monthly contribution by nearly 22% (an additional contribution of R233 849 over the period) or will need to earn an additional return of 40% to end up with the same capital over the investment horizon.

It Is Clear Why This Happens: The growth inside an RA is in a far cleaner tax environment during accumulation. The discretionary linked investment leaks returns through annual tax on interest, dividends tax, and CGT when the capital is realised.

Take it one step further: reinvest the tax saving and retire with up to 26% more than the RA only

This is where an RA stops being “just a tax deduction” and becomes a wealth-building strategy because the real win is not the tax saving itself, but what you do with it.

Let’s use a simple example.

If your RA contribution creates a tax saving of R780 per month, and you automatically invest that amount into a Tax-Free Savings Account (TFSA) instead of letting it disappear into day-to-day spending, you create a second stream of wealth creation, without increasing your lifestyle budget.

If you start with R780 per month and only increase that contribution by 5% per year, the additional investment can add up to roughly R10 million by retirement.

This is not a “nice-to-have bonus”, it is a meaningful increase in future financial freedom created purely by turning a tax saving into a disciplined investment habit.

And this is where good advice adds real value: not only recommending an RA, but helping you make small changes to your financial behaviour to convert the tax saving  into wealth.

Important to Know Before You Invest in an RA

An RA is not a one size fits all solution. It is a retirement wrapper, not a general-purpose liquidity account. Except for the savings component under the Two-Pot system, an RA generally cannot be accessed before age 55. At retirement, benefits are then taxed under the retirement lumpsum and annuity rules, and annuity income is taxable in the member’s hands.

A fair way to think about it is this: the modern RA is often the best tool when the goal is to build long-term retirement wealth, make good use of the available tax benefits, and committing to reinvesting the tax saving. A discretionary investment still plays an important role when flexibility and access are priorities, or when the money is intended for goals outside of retirement.

Conclusion

Modern retirement annuities are more than a “tax product”, it is a wealth-building tool. When it is used as part of a comprehensive, bespoke financial plan  it helps to build long-term wealth in a disciplined way, while giving the investor valuable tax advantage that can accelerate growth  and help them reach that universal goal of financial freedom.