Best investment South Africans can make for retirement

Corne Bouwer, CEO of Heptagon Capital, illustrated that a retirement annuity (RA) can be one of the best investments for retirement. 

Bouwer told BusinessTech that RA’s will remain one of the best investments any individual can make for the foreseeable future. 

With the proper discipline, Bouwer added that an RA can deliver an annual return of up to 40%—a figure that few other investments can match.

Bouwer described RA’s as one of the “best investments” individuals can make, whether formally employed or running their own businesses. 

“It doesn’t matter if you already have a pension or provident fund through your employer or if you’re self-employed—an RA is the perfect way to top up your retirement savings,” he said.

Despite some negative perceptions around retirement annuities, Bouwer believes the benefits outweigh any downsides. 

He highlighted four significant advantages that make RAs a “no-brainer” for anyone serious about securing their future.

Bouwer noted that the first and most obvious is the tax benefit. Contributions to a retirement annuity are tax-deductible, which means SARS effectively helps you save for your future. 

He explained the notable upside this type of investment vehicle can bring with a simple example. 

He explained that if you contribute R12,000 a year to an RA and fall into the 31% tax bracket, SARS will refund R3,720 through tax rebates. 

“If you’re disciplined enough to reinvest that rebate back into your RA, it significantly boosts your savings,” he said. 

Bouwer points out that many South Africans struggle to save consistently, often dipping into accessible funds for emergencies or impulsive purchases. 

However, retirement annuities have strict withdrawal rules: you generally can’t access the money until you’re at least 55 if you avoid tapping into your savings pot as part of the new two-pot system. 

Another significant advantage is protection against creditors. “Retirement annuities are protected by law from creditors,” Bouwer said. 

“Even if you are sequestrated, your RA savings and the income you later draw from it are safe from being seized.”

The potential

All growth within a retirement annuity is completely tax-free. Unlike other investments where you might pay tax on interest, dividends, or capital gains, the growth in an RA is sheltered, allowing your money to compound faster over time.

Bouwer shared a simple example to illustrate the potential. Suppose you invest R1,000 a month (R12,000 a year) in an RA. 

With a 31% tax rebate reinvested, you effectively get an extra R3,720 each year, which, combined with the investment growth, can deliver a return of up to 40% annually. 

“No other investment can even come near to guaranteeing this kind of return,” he said. Bouwer stresses, however, that this requires discipline—the tax rebate must be reinvested rather than spent.

One criticism often levelled against retirement annuities is that income drawn from them during retirement is fully taxable. 

However, while Bouwer acknowledged this, he pointed out that retirees generally fall into lower tax brackets because their income drops after they stop working. 

“You’ll still pay tax, but at a much lower rate, which leaves you better off overall,” he explained.

Importantly, Bouwer recommends not putting all your eggs in one basket. A balanced retirement strategy should also include other investments like endowments. 

For instance, he suggests a scenario where a retiree has both a R3 million RA and a R3 million endowment. 

By drawing 6% annually from each, the individual would receive R180,000 from the RA and R180,000 from the endowment, for a total income of R360,000 per year. 

Only the income from the RA would be taxable, and even then, it would be taxed at 18% under current rates, while the endowment income would be tax-free.

“By combining retirement annuities with products like endowments, you can ensure a very comfortable retirement with minimal tax implications,” Bouwer said.