How to build wealth with a retirement annuity

By Thomas Berry, Head of Sales at PSG Wealth

The recently introduced two-pot retirement system aims to enhance retirement outcomes for South Africans by keeping the majority of future retirement contributions invested for retirement while allowing limited access to a portion of one’s funds before retirement.

Your savings checklist

To be part of the 6% of South Africans who are able to retire comfortably, it is important that you create a savings checklist. Below are a few factors to consider.

1. Start saving as early as possible with a debit order every month, as this is a good way to create a savings discipline.
2. Understand the benefits of contributing to a retirement product. Contributions are tax deductible, and you can allocate your tax refunds to other investment vehicles such as a TFSA.
3. Set savings goals and increase your contribution amounts where possible.
4. Remember that the concept of compound growth in investments is a powerful force that allows investments to grow exponentially over time. 
5. Consult a professional financial planner or wealth adviser. A financial planner or wealth adviser will guide you in identifying your investment goals and formulate strategies on how best to achieve them.

Advantages of the two-pot retirement system

The new system offers tax-efficient product choices. Below are some of the benefits of saving for retirement and the advantages of the two-pot retirement system:

1. Emergency savings: Individuals can access their savings pot at any time subject to one withdrawal per tax year.
2. Increased savings retention: The retirement pot is safeguarded against withdrawals before retirement. Ensuring that these funds remain invested in the market allows members of retirement funds to benefit from the power of compound growth.
3. Encouragement to participate in retirement savings: The two-pot system allows you to access your money through the savings pot, making it a more attractive option for those who would otherwise avoid saving for retirement due to liquidity concerns.
4. Tax relief on contributions: Contributions to retirement funds still benefit from South Africa’s tax incentives. These tax breaks apply to both pots, encouraging savings and reducing taxable income while promoting long-term financial growth.

Your retirement annuity contributions can reduce your taxable income up to certain limits. Individuals receive attractive annual tax benefits on contributions up to 27.5% of taxable income (up to a maximum of R350 000) per tax year, and often receive these benefits as tax refunds. The challenge is to ensure that these tax refunds are not misspent but rather put towards another savings goal. Investing these refunds into a tax-free savings vehicle is a perfect way to complement your pre-retirement savings.

A reminder of the changes

The two-pot retirement system was implemented on 1 September 2024 and gives South Africans access to emergency funds whilst safeguarding retirement outcomes through compulsory preservation. All new contributions to retirement funds are now split into two pots:

1. Savings pot (one third of contributions)

• Only one withdrawal may be made in a tax year, and the minimum withdrawal amount is R2 000.
• Amounts left in the savings pot at retirement can be withdrawn and will be taxed according to the retirement lump sum tax table.

1. Retirement pot (two thirds of contributions)

• No withdrawals can be made from this pot when you leave your employer.
• You can use this money to buy an annuity when you retire.

For example, if you were to contribute R6 000 to your retirement annuity, R2 000 would be allocated to your savings pot and R4 000 would be allocated to your retirement pot.

A long-term focus

Unlike chasing short-term gains or ‘quick’ returns, building wealth is a process that takes many years and requires consistent action. Part of planning for a successful financial future involves making tax-efficient choices and, for many investors, that starts with investing in a retirement annuity.