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Consider a member who makes an ongoing contribution of R10 000 pm to a retirement fund in addition to the maximum tax allowed R350 000 contribution in a year. The payroll will continue to transfer the full contribution to the fund and deduct the tax from the member’s cash remuneration. For the purposes of doing a comparison, we will assume that the amount invested is the net after tax amount. The investment returns in the fund will be tax-free. Upon retirement the lump sum benefit less un-deducted contributions are taxed at 36% (we assume that the member will in any event withdraw an amount of R1.050 million which means that any additional lump sum will be taxed at 36%).

This is then compared with a direct investment in a collective investment scheme. In the collective investment example we also assume that the amount invested will be net of tax. The investment returns however are subject to dividend, interest and capital gains tax. Any pay out at the end of the investment period will be tax-free. We assume a similar investment in both vehicles providing a return of CPI + 5%. We assume a higher cost structure in the collective investment and have therefore reduced the return by 1.5%. This amount can be bigger or smaller depending on the circumstances.

In the table below we compare the projected net proceeds of the two vehicles over a 5 to 30 year period.

 Retirement FundCollective Investment 
YearGross lump sumRetirement fund taxNet lump sumNet value fund% difference
5R 542 457 - R 45 398 R 497 059R 515 069 -3.5%
10R 1 739 347 - R 254 821 R 1 484 526R 1 527 655 -2.8%
15R 4 191 385 - R 810 348 R 3 381 037R 3 351 894 0.9%
20R 8 996 219 - R 2 056 638 R 6 939 581R 6 530 798 6.3%
25R 18 138 856 - R 4 633 684 R 13 505 172R 11 948 098 13.0%
30R 35 180 137 - R 9 713 157 R 25 466 980R 21 024 950 21.1%

The collective investment provides a slightly better net return over the 5 to 10 year period. Over longer periods the non-deductible retirement fund contribution provides a better return. Over 20 years it is 6.3% better and over a 30 year period it is 21.1% better.

This example can be considered a worst case scenario. If the member purchases an annuity the amount will not be subject to the 36% tax and the annuity payable will be tax free up to the amount of the un-deductible contributions made (they will not be inflation adjusted).

Other considerations

The comparison on its own may not convince members to elect one or the other option. Many members may prefer to continue to make contribution to the fund on account of -

  • The convenience of the investment, especially for persons closer to retirement.
  • The investment is protected against creditors.

Other members may lean in the opposite direction in view of the following considerations:

  • A member can have total control over the investment outside of the fund. They do not have to comply with regulation 28 and they can use it as security, liquidate it and use it for other purpose at any time.
  • It provides added flexibility and offers members the opportunity to stagger their retirement – something that a single investment in a retirement fund is unable to offer.


As benefit consultants we encourage funds to amend their rules to allow members to limit their contributions to R350 000. Based on the results of the worst case comparison though, members need not be in any rush to limit their retirement fund contributions.

Sanlam Life Insurance is a licensed financial service provider.
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