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Investing for your retirement – which product to use?

Retirement annuities (RAs) and tax-free savings accounts (TFSAs) - which is better when planning for your retirement?

18 May 2022 · Harper Banks

Investing for your retirement – which product to use?

Among the investment options available to you in preparing for your retirement, retirement annuities (RAs) and tax-free savings accounts (TFSAs) rate highly for tax efficiency. But which would be better for you?

We have a look at the differences between the two, and we explain which you should pursue first when it comes to your retirement planning.

Tip: You can find out more about both of these investment options on JustMoney. Click here for more information.

What are the differences?

Both tax-free savings accounts and retirement annuities are exempt from capital gains tax, dividend tax, and income tax. That aside, they have many differences, including the following.

  1. Exposure to the market

The money you invest in an RA or a TFSA will be allocated to various asset classes, based on who you choose to invest with and the product you select.

Because an RA is considered the main retirement vehicle, it’s protected by the Pension Funds Act. Among other rules, only 30% of an RA can be invested offshore, and a maximum of 75% can be invested in company shares. 

A TFSA is not subject to these rules. It only needs to abide by general investment rules, and not those set specifically for retirement savings. This means that some TFSAs are riskier than the average RA.

  1. Contributions and liquidity

You can contribute as much – and as often – as you’d like to an RA. However, you are restricted to investing R36,000 per year in a TFSA, and you cannot invest more than R500,000 over your lifetime.

In terms of liquidity, you can withdraw any amount from your TFSA, anytime you choose. However, you are not allowed to withdraw anything from your RA until you reach the age of 55.

Once you reach this age, you have to invest two-thirds of it into a living annuity, from which you will receive a monthly income.

Which one should you invest in first?

A tax-free savings account is often used as an additional pocket of savings alongside a retirement annuity. Danie van Niekerk, executive head of financial services at Indwe Blue Star, says that both investment vehicles have a role to play in your investment portfolio.

However, he believes that you should start by investing in a retirement fund. This is because it will offer you two benefits that a TFSA will not:

  • It will give you the advantage of tax deductibility. When you submit your taxes every year, you can claim back from the South African Revenue Service if you have a retirement annuity. If you only have a TFSA, you will not receive this benefit.
  • Your savings will be safeguarded from creditors. if you struggle with debt during the course of your life, your creditors can claim money from your investments. However, they won’t be able to touch the money you have saved in your retirement fund.

You can open a retirement fund on the JustMoney platform – find out more.

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