Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Discretionary products can give RAs a run for their money

13 May 2022 Old Mutual Wealth

There are scenarios where investing surplus contributions for retirement into discretionary funds leads to better overall income longevity in retirement, according to new research from Old Mutual.

Tiaan Herselman, Head of Advice at Old Mutual Wealth says their data indicates that while all the growth in the RA vehicle is tax-free, leading to greater capital accumulation at retirement, it does not lead to greater income longevity. When only considering income longevity, there are other investment vehicles to take into consideration alongside retirement funds.

Since 2016, investors can contribute up to 27.5% of their total annual income into a retirement annuity and get a tax refund at the end of each tax year in February and, during this period many investors tend to top-up their annual contributions into RAs to the limit to ensure that they benefit from the income tax deduction.

Therefore, RAs continue to be popular due to the unparalleled tax benefits pre-retirement which not only reduce income tax liability but lead to more growth as there is no tax on interest, dividends or capital gains on funds that remain invested. They also offer various estate planning benefits as the proceeds do not fall into a deceased estate and, as a result, do not attract estate duty.

However, Old Mutual Wealth’s recent research shows that there are certain situations when clients are better off when they invest their surplus contributions in a combination of discretionary funds, such as unit trusts, tax-free investments and endowments, rather than in an RA alone.

The research explained

The example below takes a 40-year-old investor, who has R5000 in surplus contributions available every month to invest into a retirement plan, above that which his employer contributes to a pension fund.
The investor’s income goal at retirement is R25000 a month and R3500 for medical aid in today’s terms. The research considered seven different investment strategies to determine how long the investor’s income would last post-retirement in each scenario.

Surplus fund investment scenarios


Total monthly contribution

Income longevity (The point at which income needs can no longer be met in retirement)

One: R5,000 into RA

Pension Fund: R10,000 p.m.

Retirement Annuity: R5,000 p.m.

Age 100
(40 years)

Two: R5,000 into endowment

Pension Fund: R10,000 p.m.

Endowment: R5,000 p.m.

Age 103
(43 years)

Three: R5,000 into unit trust (10% tax rate)

Pension Fund: R10,000 p.m.

Unit Trust: R5,000 p.m.

Age 108
(48 years)

Four: R5,000 into unit trust (20% tax rate)

Pension Fund: R10,000 p.m.

Unit Trust: R5,000 p.m.

Age 105
(45 years)

Five: R5,000 into RA + tax saving into unit trust

Pension Fund: R10,000 p.m.

Retirement Annuity: R5,000 p.m.

Unit Trust: R1,950 p.m.

Age 107
(47 years)

Six: R5,000 into RA + tax saving into tax-free investment and unit trust

Pension Fund: R10,000 p.m.

Retirement Annuity: R5,000 p.m.

Tax-free investment: R1,950 p.m.

Age 109
(49 years)

Seven: R5,000 into tax-free investment and unit trust

Pension Fund: R10,000 p.m.

Tax-free investment: R3,000 p.m.

Unit Trust: R2.000 p.m.

Age 110
(50 years)

Noting the data in table 1, Herselman says “it is clear that the RA only compares favourably with the scenarios whereby the surplus is invested into discretionary funds when the tax saving is also invested. When the annual tax saving is not invested, the RA does not compare too well. Many investors tend to spend the tax savings they receive from SARS on an annual basis and this tends to tip the scale in favour of discretionary investments”.

“This outcome is due to the negative impact of taxation on the income drawn from the retirement annuity post-retirement. Every R1 is fully taxed as income, whereas in the tax-free investment no taxation is applied and in the unit trust and endowment structure tax is only levied on interest, dividends and capital gains,” adds Herselman.

The retirement annuity might provide the most capital at retirement, however accessing that capital in the form of an income, comes at quite a price for investors with higher expenses in retirement as there will be a bigger income tax liability to be considered.

“These scenarios do clearly make a compelling argument for the consideration of discretionary (liquid) investments in one’s retirement portfolio,” says Herselman. “However, investors need to be aware of the risks of having access to the capital in the discretionary investment vehicles and be disciplined enough to not access this capital prior to retirement. An emergency fund should be set aside for this purpose”.

The data also underpins the argument that discretionary funds allow for potentially higher returns over the long term as they are not constrained by Regulation 28 which applies to retirement funds. The regulation limits investment allocation of retirements savings to certain assets classes, including equities, property, and foreign assets.

“Deciding on the correct investment vehicle into which to invest could be quite complex and clients should always consult with a professional financial planner to get advice on the most suitable investment vehicle for their needs,” concludes Herselman.

Quick Polls


There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?


Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
fanews magazine
FAnews April 2022 Get the latest issue of FAnews

This month's headlines

The ethical core of insurance relationships
Debarment… a double whammy
A beginner’s guide to scaling the Tech Mountain
Leadership, climate and cybercrime… SA’s top risks
Unpacking the retirement reform developments
Subscribe now