A comparative analysis of tax-free savings accounts vs retirement annuities

Long-term savings are an important component of effective financial planning. Two key investment vehicles you can use for your long-term savings are retirement annuities (RAs) and tax-free savings accounts (TFSAs). Both of these investment products have various features that make them beneficial to use. By starting saving early in life, you can potentially maximise the profound benefits of compounding returns over the long term. 

10x Investments simplifies your investments with low fees, an exceptional track record and a straightforward investment approach. In this article, we compare the retirement annuity and the tax-free savings account in order to help you determine when to use each of these investment vehicles, so that you can take advantage of their offerings and potentially maximise rewards from each.  

Understanding tax-free savings accounts (TFSAs)   

Tax-free savings accounts aren’t actually ‘savings accounts’. They’re investment vehicles that were introduced in South Africa in 2015. The aim behind these investment vehicles was to incentivise South Africans to save more. They should be seen as long-term investments which allow your funds to grow without any deductions for capital gains tax, interest tax or dividends withholding tax. This allows all returns to be reinvested and to potentially grow over time without losing any value. Also, when you withdraw money, you don’t get taxed.  

There are limits on the contributions you may make every year, with a maximum of R36,000 per annum permitted. Additionally, the lifetime contribution is capped at R500,000. If you exceed these limits, this will result in a tax penalty of 40% being applied to the excess amount. In general, funds can be withdrawn at any time, without any penalties being applied.  

Withdrawals are also not taxed, but this is a long-term investment, so withdrawals should typically not be a priority and should only be used if there is an emergency. If you do withdraw funds, it is important to remember that you can’t add those contributions back in again, so this can hamper the future growth of your TFSA. Tax-free savings accounts are flexible investment products which are best suited for longer-term investing, and service providers like 10x allow for 100% of the TFSA to be invested offshore. Within the TFSA wrapper, there are a number of funds available to the investor via 10x.  

Each fund offers a different mix of assets, including equities, bonds, real estate and cash, depending on your risk tolerance and investment timelines. Our Flagship Fund is the 10x Your Future Fund. This fund has a diversified portfolio, including both local and international assets. It has a higher percentage of growth assets, such as equities and property. It’s ideal time horizon is at least 5 years and has produced 12.1% annualised returns since its inception. This would be most suitable for investors who are looking at the long term and who are more risk-tolerant.  

For more information on the funds available, follow this link. The skilled and experienced investment consultants at 10x are ready to discuss any queries you may have regarding fund selection.  

Let’s review the importance of long-term savings using the TFSA and how you can potentially reap the benefits of compound interest over time. 

Consider the following scenario: You invest the maximum R3,000 per month into a tax-free savings account (TSFA) over a 40-year period. Let’s assume you achieve an average annual return of 6% after inflation, compounded monthly.  

Keep in mind that lifetime contributions to tax-free savings accounts are capped at R500,000. You will reach your lifetime cap after 167 months (13 years, 11 months). The investment continues to grow untouched for the rest of the 40 years. At a 6% average annual return, compounded monthly, the final balance after the full 40 years would be equal to R3,517,235.11. You are free to withdraw the full amount, tax-free.  

Now, consider the exact same scenario in a standard taxable account. The amount would be the same, but you would be subject to tax on the capital gain upon withdrawal. In South Africa, 40% of your capital gains are included in your taxable income and taxed at your marginal income tax rate. The capital gain is equal to R3,017,235.11 and the taxable portion is therefore equal to R1,206,894.04.  

Lowest Tax Bracket (18%): If you fall within the lowest tax bracket, you will have to pay R217,240.93 in taxes.  

Mid-level Tax Bracket (31%): If you fall within a mid-range tax bracket, you will have to pay R374,137.15 in taxes. 

Highest Tax Bracket (45%): If you fall within the highest tax bracket, you will have to pay R543,102.32 in taxes. 

As you can see, a TSFA can shield you from having to pay potentially R500k+ in taxes.  

Understanding retirement annuities 

Retirement annuities are long-term investment products which allow an investor to build up funds while they are working. These funds may then be transferred to a living annuity or life annuity upon retirement, which is from age 55 in South Africa. The annuity will then provide the retiree with an income through the retirement years. You can contribute a maximum of 27.5% (up to a maximum of R350,000) of your taxable income to take advantage of these tax deductions. This 27.5% applies to contributions across all retirement products.  

Another feature of retirement annuities is that the returns are tax-exempt during the accumulation period. This means that all returns earned can be reinvested without any tax deductions, thus allowing returns to possibly compound over time and result in more capital available to provide for your retirement years. In terms of withdrawals, the funds need to remain invested until the retirement age of 55, apart from funds in the ‘savings pot’. 

The rules regarding withdrawals have changed since the Two Pot System was implemented in September 2024. You can now withdraw from your ‘savings pot’ once per year, subject to certain rules.  At retirement, age 55, you can either withdraw from your “savings pot” or you can transfer it to an annuity. Your “retirement pot” must be transferred to either a life or living annuity. If you have a “vested” component, you can withdraw one-third in cash, and two-thirds must be transferred to an annuity. This annuity then aims to provide you with an income during your retirement years.  

Retirement annuities are subject to Regulation 28 of the Pensions Fund Act, which limits the percentage of your retirement annuity that may be invested offshore. The current maximum offshore limit is 45%. This is to ensure that retirement products are correctly diversified. Retirement annuities are best suited as a long-term investment product for those investors who are seeking tax-deductible benefits. At 10x, there are a variety of funds on offer inside the RA wrapper that you can select from, according to your risk tolerance and time horizons. Each fund has a different mix of asset classes, and subsequently, the funds generate different returns accordingly.  

An example of a popular 10x fund available for RA investments is the 10x Income Fund. This fund aims to preserve capital over the long term as well as to provide high returns. It is diversified across the asset classes and makes use of both local and international interest-bearing assets. It is best suited for investors who are looking at a timeline of 3 years or more. Annualised returns since inception have been sitting at 9.7%. To view more funds on offer, follow this link. 

Practical considerations  

Let’s look at a few scenarios to illustrate the benefits of using a retirement annuity vs using a tax-free savings account: 

Young Professional: A young professional may look to initially use a retirement annuity to potentially maximise the tax benefits on offer. 

Mid-Career Individual: As more cash is freed up mid-career, the investor may look to invest in a TFSA and maximise the contributions allowed, while making use of an equity fund to also potentially maximise the growth potential. Funds would ideally be invested for at least 20 years. 

Approaching Retirement: In this case, the investor may be making use of both the RA and the TFSA to potentially maximise the tax benefits. 

Impact of early withdrawals 

Both retirement annuities and tax-free savings accounts are seen as long-term investment products. 

 To maximise the tax benefits offered by TFSAs, you would ideally want to avoid making any withdrawals. Withdrawing funds from your TFSA will result in there being fewer funds to possibly compound and grow over time. 

Retirement annuities restrict access more to ensure that the funds are allowed to grow over time and provide for the investor’s retirement years. Since the implementation of the Two Pot Retirement System in September 2024, investors are able to access the ‘savings pot’ of their RA once per year, for a minimum withdrawal amount of R2000. All contributions are split between the ‘savings pot’ and the ‘retirement pot’, with one-third of contributions going to the savings pot and two-thirds of contributions being directed to the ‘retirement pot.’  

The importance of low fees  

There are certain fees you can expect to find associated with your RA and TFSA. Even though you are benefitting by avoiding tax on your returns, high fees will, however, negatively impact the potential growth and compounding of your investment over time. You would mainly expect to see fees such as administration fees, management fees and perhaps also advisor fees if you are using the services of an investment advisor. 

Some fees, such as management fees, cover portfolio oversight, while performance fees generally depend on how the fund is doing. You may also find additional charges, such as transaction and administrative costs, which can accumulate and impact your savings over time.  

To maximise potential growth, it’s important to choose a provider that aims to minimise fees as far as possible, while offering full transparency about all costs involved. This allows your investment to reap the potential benefits of compound interest and build on this over time. High fees can deplete your funds and your investment growth, especially when compounded over the long term.  

Even a small difference in fees charged can make a significant difference to the growth that your investment sees over the long term. For example, A 1% annual fee difference, which seems small at face value, can reduce your total investment returns by hundreds of thousands of rands over a few decades. Note that there are no guarantees in investments, and actual results may vary. 

TFSAs generally have lower fees, but this varies from provider to provider, and there are no charges levied for withdrawals. RAs often have higher administration, transaction and management fees.  

10x offers transparent, low fees and does not charge any advisor or platform fees. By making extensive use of index-tracking strategies, 10x can keep fees lower when compared to more actively-managed funds, which involve higher fees due to the buying and selling of shares and the costs incurred through research and administration. There are no upfront, advice, or exit fees, and you don’t need to worry about penalty fees for adjusting your investment strategy.  

At 10x Investments, our retirement products feature a single management fee structure that decreases as your investment grows. Other products, such as tax-free savings accounts and unit trusts, may have different fee structures. Please refer to our fee schedules for product-specific details.  

TFSA vs RA summary

As we can see, there are certain key differences between tax-free savings accounts and retirement annuities. Tax-free savings accounts provide flexibility and tax-free growth, but they are not tax-deductible. Retirement annuities are tax-deductible, but the funds are less accessible. It’s important as an investor to be aware of your financial goals and timelines at play, so you can be accurately informed and make the best decisions regarding your investment savings.  

We can also see the importance of low fees when it comes to long-term investments. 10x makes use of index-tracking methodologies to keep costs low, combined with a more active approach to asset allocation decisions in an investment strategy geared towards long-term returns. We simplify investments with low fees, an incredible track record, and a straightforward investment approach. To learn more about our funds, speak to one of our consultants for free!