The tax implications of an RA, unit trust and tax-free investment

Daily Maverick

24-04-2025

Investors need to consider various tax implications when comparing the three product options.
Question: I am 55 years old and earn R25,000 a month. I have no retirement savings and want to invest R5,000 a month to supplement my spouse's pension. Should I invest this in a retirement annuity (RA), unit trust or tax-free investment?
Answer:
Each of these products has its own tax structure in terms of tax breaks when you invest the money; tax on the investment build-up; and tax applied to any withdrawals.
You will need to take these into account when comparing the three product options. (See the table below.)
I will take you through the typical calculations a financial planner would make.
For the calculations, I will work on you investing R5,000 a month for the next 10 years. I have assumed that inflation will be 5% and that the investment returns will be inflation +4%.
Retirement annuity
The R5,000 investment you make to the RA will come off your taxable income. This will save you an amount of R1,300 in tax each month. (See table on the top right.) You can invest this additional R1,300 a month in an RA, which means your R5,000 investment is actually R6,300, with the South African Revenue Service (SARS) in effect contributing the additional R1,300.
If you invest R6,300 a month for 10 years, the investment should be worth R1,203,842.
Now, with an RA, you are allowed to take one-third as a lump sum and the balance as a pension. (See the table below.)
As you haven't taken a retirement lump sum before, the full amount of the lump sum will be free of tax, as the first R550,000 of a retirement lump sum is not taxed.
It is recommended that you take a 5% drawdown from your retirement capital. This will give you R40,128 a year. This is too low to attract income tax, so your income and lump sum would be tax-free. (See the table below.)
Tax-free investments and unit trusts
You can only invest a maximum of R3,000 a month in a tax-free investment, so I will work on you investing the remaining R2,000 in a unit trust. After 10 years, the investment would be worth R1,007,288. (See the table below.)
Drawings from the tax-free investment would not attract tax, whereas the drawdowns from the unit trust would trigger capital gains tax (CGT). However, the gain on these drawdowns should fall within the annual R40,000 CGT exclusion, so no tax is payable. The key difference is that the tax break when you invest the premiums makes the retirement annuity (RA) an attractive option.
Returns
I did some calculations and the unconstrained investments would have to deliver returns that are 5% better than the RA for the end value of the investment to be better than the RA. So, unless this can be achieved by the tax-free and unit trust portfolio, the RA would provide the best solution. DM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected]
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.