Words on wealth: forget retirement, use these products to build wealth

I’m not crazy about the word “retirement" in the context of investing. The world is moving away from the long-held idea of a set retirement age, although there is no getting away from the fact that at some point in life, if you make it that far, you will no longer be able to work. I believe the primary motivation behind long-term investing should not be to create a nest egg; it should be to make your money work for you. The nest egg will follow.

This is especially relevant to young earners. If our investment industry pivoted its messaging away from “saving for retirement” towards “building wealth”, I believe more young people, whose brains tend to default to sleep mode on the mention of the word “retirement”, would prick up their ears and show interest.

We cannot entirely get away from the retirement savings concept, because the government kindly gives us tax incentives to save for retirement and there are investment products designed to take advantage of these incentives. My advice to young people is that whenever you see the word “retirement” below or in similar articles, substitute the word “wealth”. 

Tax-incentivised ways to save

Legislation allows for two basic types of tax-incentivised savings structure: retirement funds, which fall under the Pension Funds Act, and tax-free savings accounts (TFSAs), introduced in 2015 under the Income Tax Act. 

These products differ in that in a retirement fund your contributions are tax-deductible plus you enjoy tax-free growth on your investments (no tax on interest, dividends or capital gains), whereas in a TFSA only the latter applies – you cannot deduct contributions to a TFSA from your taxable income. 

You may already be contributing to a company pension fund. If you want to save more than this, you have three options: your fund may allow you to increase your contributions; you can put money into an RA; or you can save in a TFSA. As the 2025/26 tax year draws to a close, this is a good time to assess your contributions for the tax year and top them up if possible.

Linda Kleynscheldt, head of actuarial and product at PSG Wealth, says retirement funds – including RAs – should form the core of your retirement investments but that TFSAs also have a place. 

Retirement annuities

Kleynscheldt says there is no maximum limit on the contributions you can make to your RA but only 27.5% of your total taxable income contributed from your gross salary (up to an annual limit of R350 000) is tax deductible. 

“Generally, you can make both recurring and lump-sum premium contributions to an RA. Any additional contributions made in a year above the annual limit may be used as a deduction on your taxable income in future years. The condition associated with this tax advantage is that you must (with limited exceptions) preserve your money until the plan’s set retirement date, which is generally at the age of 55,” Kleynscheldt says.

Zander Loots, financial adviser at Alexforbes, says making additional contributions to an RA remains one of the most effective tools for reducing taxable income before the tax-year end. “For example, a man earning R1 million who contributes the full 27.5% (R275 000) reduces his taxable income to R725 000. His effective tax rate drops from 29.2% to 25.1%, and he saves R110 092 in tax,” he says.

Loots says other key benefits of an RA include: 

• No tax on interest, dividends or capital gains (as in a TFSA).
• Unless there are no beneficiaries or dependants, the fund does not form part of your estate.
• Your savings are generally protected from creditors.
• It is portable across employers.
• You can increase, decrease or pause contributions or make ad-hoc lump-sum contributions into a non-contractual RA.

Until recently all your savings in an RA were inaccessible before age 55. Kleynscheldt says that, following the implementation of the two-pot retirement system, access to savings in RAs has been enhanced. “From September 1, 2024, one third of your contributions has been allocated to a savings pot, from which you can make an annual withdrawal. However, any withdrawals will be taxed at your marginal tax rate and cannot be fully replenished through future additional contributions if you have already used up your annual contribution allowance,” she says.

TFSAs

Kleynscheldt says you can make regular or lump-sum contributions to a maximum of R36 000 per year with an overall lifetime contribution limit of R500 000. 

“While TFSAs may be used for a variety of needs, they are a great way to supplement your retirement income, or they can be used instead of making a lump-sum withdrawal from your RA at retirement. This allows your full retirement savings to be invested in a post-retirement product, such as a living annuity or life annuity, without any tax implications,” she says.

Loots notes that unused TFSA allowances cannot be carried forward. “If you don’t invest the full R36 000 before the end of February, you lose the opportunity for that year permanently and it will take you longer to get to the lifetime limit,” he says.

An itch to switch?

One advantage of using these tax-incentivised products over discretionary investments may be under-emphasised for fear of people making bad investment decisions: if you have an RA or TFSA on an investment platform that offers a choice of underlying investment funds, because you are not liable for capital gains tax, you can switch underlying funds without affecting your tax bill. Worth mentioning, but switch with caution, preferably under the watchful eye of a trusted adviser.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE