RA vs TFSA: the dynamic duo for your retirement savings

As we move into the new year, it’s a good time to look at our financial plan and set realistic goals to work towards this year. Saving for retirement is one item that should be on everyone’s list of annual objectives. Retirement annuities (RAs) and tax-free savings accounts (TFSAs) are two products that make saving wonderfully easy.

RAs are well-known retirement savings products that recently gained an additional feature: limited access to savings, which came into effect with the introduction of the two-pot retirement system. By contributing annually into an RA, which mainly aims to preserve your savings for retirement, you can – over time and with discipline – build up a pot of capital from which you can withdraw an income when you reach retirement age.

TFSAs are products that were introduced in South Africa in 2015, and while they were not specifically designed for retirement, the zero tax levied on growth in these products can be leveraged to supplement retirement savings invested in more traditional retirement savings vehicles.

The role of each product in a retirement plan

Retirement funds – including retirement annuities and preservation funds – form the core product suite supported by tax incentives and compulsory preservation requirements, as they are specifically designed to save for retirement. 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. This means saving in a retirement product lowers your assessed income on which personal income tax is levied.

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.

For TFSAs, contributions or a lump sum contribution (maximum annual allowance of R36 000) may be saved every year with an overall lifetime contribution limit of R500 000. Income, capital gains, and dividends are not taxed on either of these products, making them both excellent options for those looking to save in a tax-efficient way.

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.

Another key feature of both products is that there is no age limit on investing in them. If you are fortunate to be able to continue saving after your retirement, you can use it to continue saving in a tax-efficient way.

How the two-pot retirement system impacts each product

Following the implementation of the two-pot retirement system, access to savings in retirement annuities has been enhanced. From September 1, 2024, one third of your retirement contributions will be 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.

While the two-pot system has provided some access to otherwise inaccessible savings, this comes at a cost, as it is effectively a loan against your future self. By contrast, a disinvestment from a TFSA will not attract additional tax at the point of disinvestment and may therefore be a more tax-efficient way of accessing savings if the need arises.

Understanding tax implications before making any large withdrawal decisions is important. Speaking to a trusted financial adviser or a tax expert should be a key consideration before reaching out for a withdrawal form.

The dynamic duo effect

When considering your long-term financial plan, the appropriate product choice will depend on your individual circumstances. A combination of an RA and TFSA may be a suitable way to achieve your desired outcomes by leveraging the benefits inherent in each, helping you to meet your retirement and savings goals.

While RAs should still be considered as a traditional retirement savings vehicle, the tax advantages and simplicity of access to savings invested in a TFSA mean that when used together, these products offer excellent complementary features to save for retirement within set annual limits. Speak to your financial adviser to find out how you can make use of any unused contribution limits before tax year-end and move one step closer to reaching your savings goals.

* Kleynscheldt is the head of actuarial and product at PSG Wealth

PERSONAL FINANCE