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Minimizing Your Tax Burden with a Retirement Annuity

Tax season is upon us which means it’s time to find ways to minimize your tax burden in the most efficient way possible.

Although there are many ways to optimize your tax deductions, a retirement annuity may be one of the most beneficial vehicles to save on tax.

In this article, we explain how a retirement annuity can help you save on tax in the next financial year and beyond.

tax benefits of a retirement annuity

What is a Retirement Annuity?

A retirement annuity is quite simply a one-person pension plan or retirement fund. Retirement Annuities (RAs) are particularly useful for self-employed individuals or for those who would like to give their company subsidized pension a boost.

Retirement Annuity Tax Benefits

It’s no secret that RAs are tax deductible up to a certain amount, but few people know that an RA can provide a few other ways to save tax.

Below are ways that a retirement annuity in South Africa can help you save tax every financial year:

  • There is no tax on capital gains or interest on your investment
  • You may deduct your contributions from your income tax at the end of the year. The deductible amount is up to a certain limit
  • After you have retired and converted your retirement annuity into a living annuity, you will not pay tax on growth within the living annuity
  • After retirement, you will only pay tax on the portion you draw as income each year
  • Your tax rate is generally much lower when you retire than it was when you were working. If you receive a lump sum at the time of retirement, you will not pay tax for an amount of up to R500 000 and the tax you receive is determined using normal tax tables and calculations
  • Tax rebate on medical expenses for individuals over the age of 65 will increase. This means that when retirement annuity funds are used to cover medical expenses, it is partially tax free due to the medical tax rebate laws of South Africa
  • On retirement, you can choose one of two compulsory life annuities. The investment-linked living annuity you can manage the income you receive and, as a result, you manage your income tax position as well
  • Should you resign from your employer before you retire and you receive a withdrawal benefit from your provident or pension fund, you can preserve your retirement benefit by transferring it to a preservation fund or a retirement annuity with exemption from tax

Other Financial Benefits of a Retirement Annuity

Disciplined Savings

Retirement annuities are fixed savings vehicles; this means that you are not able to access your retirement savings before you retire. This prevents you from spending your savings impulsively on things you may not need.


Your retirement annuity is for the sole purpose of long-term stability as it facilitates real growth within the vehicle, protecting you from short-term fluctuations in the market.

Compound Growth

Simply put, compound growth means that you earn growth on the growth. Ultimately this means that the longer you invest and save for, the bigger your advantage will be. To put it into perspective, over a 30-year period, more than 65% of the value of your RA can come from compound growth alone.

Supporting Dependents

Should you pass away, your retirement annuity can provide for the loved ones you leave behind. Furthermore, because the cash benefit does not form part of your estate, creditors will not have access to the retirement funds you worked so hard to build.

Olemera – Financial Planning Services in Johannesburg

With tax season around the corner, it is crucial to take the necessary steps to become as tax efficient as possible and a retirement annuity is a sure way to help with this endeavor.

However, we know that the financial world and all its jargon and special calculations can be extremely difficult to navigate. Speaking to one of our qualified and experienced financial advisors in Johannesburg can help you better understand the importance of tax efficient savings vehicles such as RAs.

Saving for your retirement is easily one of the most important parts of your personal financial plan, especially if you wish to live comfortably once you stop working.

Speak to us for expert advice regarding your personal financial plan, tax efficiency and retirement goals. We guarantee to put together a tailor-made financial plan that will help you achieve all your short- and long-term goals.

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