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1. Tax-deductible Contributions

Contributions are tax-deductible up to a certain maximum (e.g. if you fall in the 45% maximum marginal tax rate, then the SARS is sponsoring almost half of your contribution towards your retirement). (The annual income tax threshold for over 65’s is R 117 300 and for over 75’s R 131 150 – thereby reducing your chance of paying tax at all on the proceeds despite the deduction).

2. Employer Contributions

Your employer (if applicable) can deduct all their contributions without any limitation (previously max. 20%), but of course these contributions rank as a taxable fringe benefit.

3. Disallowed Contributions

Disallowed contributions can be carried over to the next year of assessment and, if unused during the contribution period, can (1) be offset at retirement to increase the tax-free portion of the lump sum, or (2) claimed as a tax deduction against taxable income. The Taxation Laws Amendment Act of 2016 provided for the restoration of the tax deduction against ‘passive income’ which would include compulsory-purchase annuities and taxable investment income.

4. The Abolition of Retirement Fund Tax

The abolition of retirement fund tax meant that, with effect from 1 March 2007, no tax on interest or rental income would be imposed on the fund. This benefits anybody who pays tax. Therefore no tax at all will be paid on the build-up, as dividend income and capital appreciation is tax-free and capital gains tax is not applicable. This is like having a tax-exempt share portfolio. Dividend Withholding tax (DWT is 20%) is not levied on retirement funds either, including RA’s.

5. Taxation of Lump Sums

Your lump sums at death, disability or retirement are taxed at 0% up to (R500 000 in total from 1 March 2014 plus disallowed contributions.

6. Mature Your Retirement

The balance of the lump sum is taxed on a sliding scale. On a lump sum in excess of R500 000 but no more than R700 000 at 18%; between R700 001 and R1 050 000 at 27% and at 36% on lump sums in excess of R1 050 000. Because you can stagger your retirement with an RA you can mature your RA at any time after age 55 (previously not beyond age 70). With an employer pension or provident fund, you have to retire from your employer and fund at the same time2.

7. Exemption of RA Proceeds from Estate Duty

Previously, on death, only the value of the compulsory annuity purchased with the fund benefit was free of estate duty. Since 1 January 2009 the entire proceeds of the RA (including the lump sum) was exempt from estate duty. This provided a planning opportunity for the wealthy estate owner to make a large single-premium contribution to an RA to reduce his or her estate for estate duty purposes.3 (You could also donate a lump sum to your spouse (donations tax exempt) thereby saving estate duty of 20%. The spouse can then use that money to fund an RA, which he or she can mature at 55. Even if that spouse is not earning taxable income the contributions can be tax-deductible later as set out in Disallowed Contributions). Should that spouse pass away his/her RA will also be free of estate duty – subject to the inclusion of disallowed contributions as “property” for estate duty purposes.

8. Retirement Preservation if You Resign

If you resign from your employer and receive a withdrawal benefit from your pension or provident fund, you can preserve your retirement benefit by transferring it into either a preservation fund or an RA fund, on a tax-exempt basis. This includes former public sector members (e.g. GEPF and local authority employees), and “friendly society” members whose before 28/02/1998 tax-exempt benefits will be preserved.

9. You Can Choose Your Life Annuity

On retirement, you have a choice between two types of compulsory life annuities, namely an underwritten annuity and an investment-linked living annuity, or even a combination thereof. Assuming your risk profile justifies the decision, by choosing the investment-linked living annuity you can manage the income you receive (between 2.5% and 17.5% of the capital amount each year) and consequently also manage your income tax position. Another advantage is that any growth on the assets backing the annuity is not taxed as only the income you receive in your hands is taxed in terms of current tax law.

10. Tax Deduction on Medical Expenses Increases

Most people experience a big increase in medical expenses once they retire. Thankfully, once you have reached age 65, your tax deduction on medical expenses increases. An RA can be used to build up a fund for post-retirement medical expenses in a tax-efficient way, as we have already seen. On retirement although the annuity is fully taxable, to the extent that it is used to cover medical expenses it is partially deductible again.


These tax savings can be substantial and can greatly improve the overall return on your investment. However, surprisingly for many, the biggest advantage of an RA may not be tax-related at all. An RA is a disciplined way of saving on a regular contractual basis (not an “if I can spare it” kind) that can also be made to give guaranteed results. The fact that the capital cannot be accessed before at least age 55 (except in the case of disability) is often a blessing in disguise. This means that you are more likely to reach retirement with some capital to produce a retirement income if you follow the RA route, unlike many other types of liquid investment which, experience shows, are raided for other purposes long before retirement.

You might be familiar with the old annual tax deduction limits4: The greater of:

  • 15 % of non-retirement funding taxable income; or
  • R3 500 – (minus) deductible contributions to a pension and/or provident* fund; or
  • R1 750

*Logically if on a Provident Fund- which only allows deductible contributions by the employer the limit was R3 500 pa. These rules were replaced from 1 March 2016.

The Taxation Laws Amendment Act of 2013, passed in December 2015 provided, inter alia, for a change to the deduction regime to an ‘all-in’ 27.5% of the higher of taxable income5 or “remuneration” for individuals to all pension; provident and RA funds. Also provided unfortunately is a ‘cap’ on allowable deductions of R350 000 p.a. The implementation date was 1 March 2016.

Sanlam has the Cumulus Echo Retirement Annuity. An additional amount of money (the ‘Echo Bonus’) is added to the investment at termination of the RA or at retirement. This bonus rewards savers the longer they keep the policy. For example this could mean an extra 50% of the fund value at retirement for a 25 year term recurring- premium investment.

Sanlam still offers a ‘Linked’ RA (Stratus & Cobalt for Professionals Linked RA). Investment funds from most major asset managers are available.


If the total value of the benefit held in a particular RA fund on behalf of the taxpayer has never exceeded the amount of R247 500, the full amount can be taken as a cash lump sum at maturity or death, provided the Fund rules allow. This was increased from R75 000 on 1 March 2016. If the member officially emigrates he/she can terminate membership and receive the after- tax proceeds in a cash lump sum, even prior to age 55. The TLAA No. 15 of 2016 allowed foreigners with RA’s to terminate and withdraw when their work visa expires or they leave SA permanently.


1RA fund contributions that are paid by an employer from pre-tax income of the employee are from 1 March 2010 a tax deduction for the member. However, the employer will have to treat such payment as taxable in the hands of the employee and at the same time take a member contribution deduction by the employee into account for PAYE purposes.

2In 2015 the Min. mentioned that pension and provident funds will be allowed to defer their retirement. The TLAA No. 17 of 2017 provides that fund members will be able to transfer their benefits to an RA for later consumption and accrual of the tax-free lump sum w.e.f. 1/3/2018.

3This planning opportunity was partially removed: i.t.o. the Taxation Laws Amendment Act, 25 of 2015 the disallowed (‘excess’) contributions made since 1 March 2015 are included in the dutiable estate from 1 January 2016 (retrospective). This also applies to the life annuity or ILLA purchased with the retirement fund. N.B.

4Sec 11(n) ITA was deleted and the amended sec. 11(k) applied from 1/3/2016. The TLAA of 2017 has deleted 11(k) and replaced it with sec. 11F retrospective to 1/3/2016.

5Includes passive income and capital gains (subject to restriction), taxable retirement fund benefits or withdrawals and taxable severance benefits w.e.f. 1/3/11. Includes the taxable portion of employer-funded car allowances and income from the carrying on of a trade.

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