Investments

A retirement annuity (RA) is a long-term savings vehicle designed specifically for retirement. It is one of the most tax-efficient ways to save for retirement available to South Africans, particularly those who are self-employed or do not belong to an employer-sponsored pension or provident fund.

Here is how it works:

• You make regular or ad hoc contributions to the RA
• Your contributions are invested in a range of underlying funds according to your chosen investment strategy
• Contributions are tax deductible up to 27.5% of the higher of taxable income or remuneration, capped at R350,000 per tax year
• Investment growth inside the RA is largely free of income tax, capital gains tax and dividends tax while still invested
• You can access your RA from age 55, at retirement, you may take up to one third of the fund value as a lump sum (the first R550,000 is tax free), and you must use the remaining two thirds to purchase an annuity income
• Until retirement, the funds are locked in and protected from creditors

RAs are regulated under the Pension Funds Act and are subject to Regulation 28, which limits exposure to certain asset classes to manage risk.

A living annuity and a life annuity (also called a guaranteed annuity) are the two main options for converting your retirement savings into an income. They work very differently:

Life annuity: You hand your capital to an insurer in exchange for a guaranteed monthly income for the rest of your life (and optionally your spouse’s life). The income is guaranteed regardless of how long you live or how markets perform. However, when you die, the capital is gone. There is nothing left for your estate or beneficiaries (unless you selected a with-profit or joint life option).

Living annuity: Your capital remains invested in your name. You draw an income at a chosen rate. If you die, the remaining capital passes to your beneficiaries. However, there is no guaranteed income so if you draw too much or returns are poor, you can run out of money.

The right choice depends on your health, life expectancy, income needs, estate planning wishes, and risk tolerance. Many retirees use a combination of both: a guaranteed annuity for essential expenses and a living annuity for flexibility and potential estate value. An Ambiton adviser will help you make this critical decision.

When you leave an employer, a preservation fund allows you to transfer your pension or provident fund benefit and preserve it for retirement rather than drawing it out and paying tax. It's one of the most commonly overlooked planning opportunities we see.

Both are employer-sponsored retirement vehicles. The key differences lie in how contributions are taxed and how benefits are paid out at retirement. A pension fund restricts cash withdrawals to one third at retirement; a provident fund historically allowed the full benefit in cash, though legislation has aligned these more closely in recent years. 

The two-pot retirement system was introduced on 1 September 2024 and fundamentally changed how South African retirement fund members can access their savings before retirement.

Under the two-pot system, all new contributions to retirement funds (including RAs, pension funds and provident funds) are split as follows:

• Savings pot (one third of contributions): Accessible once per tax year before retirement, with a minimum withdrawal of R2,000. Withdrawals are subject to income tax at your marginal rate and require a SARS assessment
• Retirement pot (two thirds of contributions): Locked in until retirement. Must be used to purchase an annuity at retirement (subject to the usual one-third/two-thirds rules)

In addition, a “seed capital” amount of 10% of your fund value (capped at R30,000) was moved into your savings pot on 1 September 2024, giving immediate access to a portion of existing savings.

The two-pot system is designed to reduce the problem of South Africans cashing out their full retirement savings when changing jobs, while providing a limited safety valve for financial emergencies. If you are considering accessing your savings pot, speak to an Ambiton adviser about the tax implications and the long-term impact on your retirement savings.

The tax benefits of a retirement annuity in South Africa are substantial and operate on three levels:

1. Tax deductible contributions: You can deduct RA contributions of up to 27.5% of the higher of your taxable income or remuneration, capped at R350,000 per year. This reduces your taxable income in the year of contribution, providing an immediate tax saving
2. Tax-free growth: While your money remains invested in the RA, returns are not subject to income tax on interest, capital gains tax on growth, or dividends withholding tax on dividends. This allows compound growth to work more efficiently over time
3. Tax-free lump sum at retirement: At retirement, the first R550,000 of your total retirement fund lump sum is tax free (across all retirement funds combined, over your lifetime). If you have not previously made a withdrawal, this full amount is available

Any unused contributions (where your contributions exceed the annual deductible limit) are carried forward to future years and can be used to increase your tax-free lump sum at retirement. This is a valuable benefit for high earners who contribute above the annual deduction cap.

In most cases, no. Retirement annuity funds are locked in until you reach the minimum retirement age of 55. This is a key feature of the product i.e: the restriction protects your retirement savings from early depletion.

The limited exceptions where early access may be possible include:

• Emigration: If you formally emigrate from South Africa and your tax residency changes, you may be able to access your RA after a three-year waiting period, subject to tax. Note that the rules around financial emigration have changed significantly since the introduction of the new exchange control framework in 2021
• Terminal illness or disability: Some funds allow early access in cases of severe illness or permanent incapacity, subject to fund rules
• Small fund withdrawal: If the total value of the RA is below R7,000, a full withdrawal may be permitted

If you are considering early withdrawal or have questions about your specific circumstances, speak to an Ambiton adviser before making any decisions because the tax consequences of early withdrawal can be significant.

The proceeds of a retirement annuity on death are not governed by your will. Instead, they are distributed at the discretion of the retirement fund trustees in terms of Section 37C of the Pension Funds Act.

The trustees are required to identify all financial dependants of the deceased which may include a spouse, children, or other persons who depended on the deceased for financial support and distribute the proceeds equitably among them.

Your nominated beneficiary form is an important guide for the trustees, but it is not legally binding.

This means it is critically important to:

• Keep your beneficiary nomination form updated with your fund administrator
• Ensure the form accurately reflects your current dependants and their financial circumstances
• Communicate your wishes clearly to your financial adviser so they can assist your family through the process if needed

RA death benefits paid to dependants are generally not subject to estate duty, which is a significant advantage compared to assets that form part of the deceased estate.

Both a retirement annuity (RA) and a pension fund are retirement savings vehicles that offer tax benefits, but there are important structural differences:

• Membership: A pension fund is employer-sponsored so you belong to it through your employer. An RA is an individual product that anyone can take out, regardless of employment status. It is particularly useful for the self-employed, business owners, and employees who want to save more than their employer fund allows
• Contributions: Pension fund contributions are made by the employer and employee as a set percentage of salary. RA contributions are flexible meaning you can choose the amount and can vary or pause them
• Regulation 28: Both are subject to Regulation 28, which limits exposure to equities, offshore assets and other asset classes. RAs may have slightly different limits depending on their structure
• Access on resignation: When you leave an employer, you can access your pension fund (subject to tax). An RA cannot be accessed before age 55 regardless of employment status
• Retirement: Both allow a one-third lump sum at retirement with the balance used to purchase an annuity income

Many people contribute to both an employer pension fund and a personal RA to maximise their retirement savings and tax deductions. An Ambiton adviser can help you determine the right combination.

A retirement annuity and a provident fund are both retirement savings vehicles, but they have historically differed in how benefits are paid out at retirement:

• Pension fund and RA: At retirement, you may take up to one third as a lump sum and must use the remaining two thirds to purchase an annuity income
• Provident fund: Historically allowed the full benefit to be taken as a cash lump sum at retirement

However, this distinction was significantly reduced by the Retirement Funds Amendment Act (the “two-pot” reforms and prior annuitisation legislation). As of 1 March 2021, new contributions to provident funds by members under age 55 are subject to the same annuitisation requirements as pension funds and RAs. Contributions made before that date retain their old rules.

The two-pot retirement system, introduced on 1 September 2024, further changed how retirement fund withdrawals work by creating a “savings component” (one third of contributions) that can be accessed once per year before retirement, and a “retirement component” (two thirds) that remains locked in until retirement.

Given the complexity of these rules, we strongly recommend speaking to an Ambiton adviser to understand how these changes affect your specific retirement savings.

Both products offer tax advantages, but they work very differently:

• Retirement annuity: Contributions are tax deductible (up to the annual limit). Growth is tax sheltered. Benefits are taxed at retirement (though the first R550,000 is tax free). Funds are locked in until age 55. Subject to Regulation 28 asset allocation limits
• Tax-free savings account (TFSA): Contributions are made with after-tax money (no upfront deduction). All growth, interest and withdrawals are completely tax free, forever. Funds are accessible at any time. No asset allocation restrictions. Contributions are limited to R36,000 per year with a lifetime limit of R500,000

An RA is generally better suited for long-term retirement savings where you want the upfront tax deduction and can commit to locking the money away. A TFSA is better suited for medium-term savings where flexibility is important, or as a complement to an RA for investors who have maximised their RA contribution.

Most financial advisers recommend using both products in combination. An Ambiton adviser will help you determine the right balance for your circumstances.

Retirement annuity funds can be included in the division of assets on divorce in South Africa. The non-member spouse may have a claim against the RA in terms of a divorce order, subject to the Pension Funds Act and the clean break principle introduced by the Divorce Act.

The clean break principle allows the non-member spouse’s share to be paid directly from the fund at the time of divorce, rather than waiting until the member spouse retires. The fund is required to comply with a valid divorce order assigning a portion of the benefit to the non-member spouse.

The tax treatment of the divorce settlement amount from an RA depends on the structure of the payment - this is a specialist area and we recommend obtaining both legal and financial advice if divorce is relevant to your situation.

Yes. You can reduce or stop contributions to a retirement annuity at any time. Making a retirement annuity “paid up” means you stop contributing but the existing fund value remains invested and continues to grow until you retire.

Before stopping contributions, consider:

• You will lose the ongoing tax deduction on contributions
• Some older RA contracts have penalties for reducing or stopping contributions (check your policy terms)
• The fund value remains locked in until age 55 regardless of whether you are contributing
• If your financial circumstances have changed temporarily, a contribution holiday may be preferable to cancelling entirely

If you are considering stopping contributions due to affordability, speak to an Ambiton adviser first because there may be a more efficient way to restructure your financial commitments without sacrificing your retirement savings.

A living annuity is a post-retirement income product in South Africa. When you retire from a retirement fund (pension fund, provident fund, or retirement annuity), you are required to use at least two thirds of your fund value to purchase an annuity income. A living annuity is one of two main options for doing this.

With a living annuity:

• Your retirement capital is invested in underlying investment funds of your choice
• You draw a monthly income from the capital at a drawdown rate you choose, between 2.5% and 17.5% of the fund value per year
• The drawdown rate is reviewed and reset annually on your policy anniversary
• The capital remains invested and can grow (or decline) depending on investment performance
• When you die, any remaining capital passes to your nominated beneficiaries — either as a lump sum or as a continued annuity income

The key risk of a living annuity is longevity risk i.e. if you draw too much income or investment returns are poor, you may exhaust your capital before you die. Careful drawdown management and investment strategy are critical.

The drawdown rate is the percentage of your living annuity capital that you draw as income each year. The minimum allowed is 2.5% and the maximum is 17.5%, reviewed annually.

Choosing the right drawdown rate is one of the most important decisions in retirement planning.

As a general guideline:

• A drawdown rate of 4% to 5% is widely considered sustainable over a long retirement, assuming reasonable investment returns
• A drawdown rate above 7% significantly increases the risk of depleting your capital before you die, particularly if you retire young or live longer than expected
• A drawdown rate below 4% may be too conservative if it does not meet your income needs

The sustainability of your drawdown rate depends on your investment returns, inflation, life expectancy, and whether you have other sources of income. At Ambiton, we model various scenarios with our clients to help them choose a drawdown rate that balances income needs with the long-term sustainability of their capital.

The primary risks of a living annuity are:

• Longevity risk: You outlive your capital. If you draw too much income or investment returns are poor, you may exhaust your fund before you die, leaving you with no income in your final years
• Investment risk: Your capital is exposed to market movements. A significant market downturn early in retirement can permanently impair your fund value and income sustainability
• Sequencing risk: Poor returns in the early years of retirement, combined with ongoing drawdowns, can have a disproportionately damaging impact on the long-term sustainability of the fund
• Inflation risk: If your income does not keep pace with inflation over a long retirement, your real purchasing power erodes significantly
• Behavioural risk: Increasing the drawdown rate in response to short-term financial pressure is one of the most common and damaging mistakes living annuity holders make

These risks can be managed through careful investment strategy, a sustainable drawdown rate, and regular reviews with a financial adviser. At Ambiton, we actively monitor our clients’ living annuity positions and provide ongoing guidance on drawdown rates and investment allocation.

One of the key advantages of a living annuity over a guaranteed annuity is that the remaining capital does not disappear on death. When the living annuity holder dies, the remaining fund value passes to the nominated beneficiaries, who have three options:

• Take the balance as a cash lump sum (subject to income tax)
• Continue drawing an income from the living annuity (the beneficiary becomes the new annuitant)
• Transfer the balance to their own retirement annuity or other approved fund (if they are under retirement age)

Living annuity death benefits are not subject to estate duty, which makes them a tax-efficient way to transfer wealth to the next generation. However, the income drawn by beneficiaries is subject to income tax at their marginal rate.

It is important to keep your beneficiary nominations on your living annuity updated, particularly after major life events such as marriage, divorce, or the death of a beneficiary.

No. The proceeds of a living annuity paid to nominated beneficiaries on the death of the annuitant are not subject to estate duty. This is one of the most significant estate planning advantages of a living annuity.

Because the living annuity does not form part of the deceased estate, it is also not subject to executor’s fees or the delays associated with estate administration. The capital can be accessed by beneficiaries relatively quickly after death.

This makes the living annuity a useful tool in broader estate planning, particularly where the goal is to transfer wealth efficiently to the next generation while providing the annuitant with retirement income during their lifetime. An Ambiton adviser can help you integrate your living annuity into your overall estate plan.

In most cases, a living annuity cannot be fully withdrawn as a lump sum. It is designed to provide a retirement income, and the capital must remain in the annuity structure until death.

However, there is a full commutation (de minimis) rule: if the total value of all your living annuities falls below R125,000, you may be permitted to commute (cash in) the full amount as a lump sum. This typically applies when the fund has been depleted through ongoing drawdowns to below the threshold.

The full commutation amount is subject to income tax at your marginal rate in the year of receipt. This can result in a significant tax liability if the amount is large relative to your other income.

There is no general provision to fully cash in a living annuity simply because you want access to the capital. If you need liquidity, options include increasing your drawdown rate (up to the 17.5% maximum) or restructuring your broader financial plan.

Speak to an Ambiton adviser before making any changes.

Income drawn from a living annuity is subject to income tax in South Africa at your marginal rate. SARS treats the monthly annuity income as taxable income, and the annuity provider is required to withhold PAYE (Pay As You Earn) tax on the income.

The tax implications at various stages are:

• While invested: Growth inside the living annuity (interest, dividends and capital gains) is not taxed while it remains in the fund
• Monthly income: Taxable at your marginal income tax rate, subject to PAYE withholding
• Death benefit: The lump sum paid to beneficiaries is taxable in their hands at their marginal rate. If beneficiaries choose to continue drawing an income from the annuity, that income is also taxable at their marginal rate

If your total income in retirement (including living annuity income, any other annuity income, and other taxable income) is below the tax threshold, you may qualify for a tax directive to reduce or eliminate PAYE withholding.

Speak to an Ambiton adviser or a tax professional about structuring your retirement income tax-efficiently.

A preservation fund is a retirement savings vehicle that allows you to transfer your pension or provident fund benefit when you leave an employer, preserving it for retirement rather than withdrawing it and paying tax.
When you resign or are retrenched, you have the option to:

• Withdraw the fund value in cash: subject to tax at the retirement fund lump sum tax tables
• Transfer to a preservation fund: tax free, with the capital continuing to grow toward retirement
• Transfer to a new employer’s fund (if allowed)

Using a preservation fund is almost always the better long-term decision. Withdrawing your fund when you change jobs is one of the most common and damaging retirement planning mistakes in South Africa because it depletes your retirement savings, triggers an immediate tax bill, and permanently forfeits the compound growth that would have accumulated.

Preservation funds allow one partial or full withdrawal before retirement (subject to tax), which provides some flexibility in a genuine emergency without requiring you to fully liquidate the fund.

Regulation 28 of the Pension Funds Act prescribes the maximum exposure that South African retirement funds (including retirement annuities, pension funds, provident funds and preservation funds) may have to various asset classes. Its purpose is to protect retirement savings from excessive risk concentration.

The key limits under Regulation 28 include:

• A maximum of 45% in equities (shares)
• A maximum of 45% in offshore assets (increased from 30% in 2022)
• Limits on property, hedge funds, private equity and other alternative investments

Regulation 28 applies only to money held inside retirement funds. It does not apply to discretionary investments such as unit trusts, tax-free savings accounts, or endowment policies.

For long-term investors who want higher offshore or equity exposure than Regulation 28 allows, investment products outside the retirement fund structure (such as unit trusts or endowments) can be used to complement retirement fund savings.

A unit trust (also called a collective investment scheme) is an investment vehicle that pools money from many investors to purchase a diversified portfolio of assets such as shares, bonds, property and cash. Each investor owns “units” in the fund proportional to their investment.

Unit trusts offer several advantages:

• Diversification: Your money is spread across many underlying investments, reducing the impact of any single investment performing poorly
• Professional management: A fund manager makes the investment decisions on behalf of all unit holders
• Liquidity: Most unit trusts can be bought and sold on any business day
• Accessibility: You can invest from relatively small amounts
• Flexibility: No lock-in period (unlike retirement funds), and no restrictions on how much you can invest

Unit trusts are subject to income tax on interest and capital gains tax on growth realised outside a tax-sheltered structure. They are well-suited for medium to long-term savings goals where flexibility and accessibility are important.

At Ambiton, we select unit trust funds from our panel of top-performing fund managers based on your risk profile and investment horizon.