Best investment middle-class South Africans can make

For middle-class South Africans, investing in a Retirement Annuity (RA) is arguably one of the most prudent financial decisions.

In South Africa, there is no official definition of the middle class, and estimates vary widely, from as little as R5,000 per month to as much as R29,000 per month.

Despite the varied definitions of the middle class in South Africa, which can complicate precise analysis, an average gross income of R20,000 per month is often used as a benchmark.

For individuals in this income bracket, the statistics surrounding retirement readiness are alarming.

Research consistently shows that the majority of South Africans are woefully unprepared for retirement, with only 6% able to retire comfortably.

This highlights a significant challenge for the middle class, which must balance day-to-day expenses while planning for a financially secure future.

According to Corne Bouwer, CEO of Heptagon Capital, an RA provides an excellent opportunity for middle-class earners to build wealth, primarily due to its tax advantages.

A Retirement Annuity (RA) in South Africa is a long-term investment product designed to help individuals save for retirement.

It is typically offered by financial institutions such as insurance companies, asset managers, and investment firms.

Contributions to an RA are tax-deductible up to a certain limit: 27.5% of your taxable income or gross remuneration, capped at R350,000 per year. This reduces your current tax liability.

Bouwer outlines the benefits of an RA with a simple and compelling example.

Imagine someone who earns R20,000 a month and decides to save 10% of that, or R2,000, into an RA. Over a year, this adds up to R24,000 in savings.

Normally, if you’ve paid the right amount of taxes, you wouldn’t expect to get anything back from the South African Revenue Service (SARS).

However, because RA contributions are tax-deductible, SARS gives you a tax rebate. For someone earning R20,000 a month, the rebate is 26%.

That means you get R6,240 back from SARS on your R24,000 investment.

Here’s where it gets even better. If you take that R6,240 and add it back into your RA, your total savings for the year jumps to R30,240.

With an annual return of 9%, your investment grows by R2,160, bringing the total to R32,400. This means you’ve gained R8,400 on your original R24,000—a 35% return.

Bouwer points out that while the numbers may be adjusted slightly depending on the details—such as the rebate not technically considered growth—the overall idea stays the same.

The combination of tax rebates and compound growth makes this strategy incredibly effective. Plus, if you’re in a higher tax bracket, your savings and returns could be even bigger.

The long-term benefits of this approach are huge. If you keep reinvesting your tax rebates and saving consistently for 20 to 40 years, you could build a significant retirement fund.

Bouwer says it’s hard to find any other investment in South Africa that offers such reliable and strong returns.

An RA isn’t just a good idea- it’s a game-changer for middle-class South Africans who want to secure their future.