TFSA vs RA. Which One Is The Ultimate Retirement Product In South Africa?

As we speak, only 6% of South Africans would have accumulated enough money to retire comfortably, and the meaning of ‘comfortably’ is that they’ll receive approximately 75% of their final salary cheque during retirement. I am a strong believer that a big reason for this horrific statistic is the lack of financial education that the average South African receives through our schooling system.

Two valuable tools to fight this statistic are a TFSA (Tax-Free Savings Account) and an RA (Retirement Annuity). So which one is better and which one should I have in my portfolio? The simple answer – both.

If you're trying to decide between a Retirement Annuity (RA) and a Tax-Free Savings Account (TFSA) in South Africa, the answer really depends on when you want to access your money, your tax situation, and your long-term goals. Here's a clear comparison to help you choose the best fit:

1. Tax Treatment: Contributions & Growth

RA: Contributions reduce your taxable income – up to 27.5% of your taxable income (maximum of R350,000 per year) can be deducted when submitting your tax return, making it a valuable tool for tax management.

Growth as well as investment income are also tax-free while invested, but withdrawals at retirement are taxed – with the first R500,000 lump sum tax-free and the rest taxed according to retirement benefit tax tables.

TFSA: Contributions are made from post-tax income and there is no deduction from your taxable income when you contribute. However, any interest, dividends, or capital gains earned are completely tax-free, both during growth and on withdrawal. This makes it a great investment tool over the longer term as your growth compounds over time.

2. Access to Funds

RA: Funds are locked until age 55 (unless you’re permanently disabled or emigrate). At retirement, you can only withdraw up to one-third as a lump sum, and the rest must be used to buy an annuity.

TFSA: Funds can be withdrawn at any time, with zero tax on the withdrawal. But withdrawals reduce your lifetime contribution availability* and you cannot re-contribute that amount.

*Maximum lifetime contribution limit of 500k at the time of writing. Refer below.

3. Contribution Limits & Penalties

RA: No upper limit on contributions, but you only get tax relief on the lesser of 27.5% of taxable income or R350,000 per year. Excess amounts can be carried forward to subsequent years.

TFSA: Strict limits: R36,000 per tax year and R500,000 lifetime limit. Exceeding these incurs a 40% penalty on the excess.

Example scenario: If you intend to treat your TFSA as a retirement investment, it would be beneficial to reach the 500k limit as quickly as possible. Based on the current annual limit of 36k per year, this will take you 14 years to reach.

If you started investing at the age of 27 and keep your capital invested until retirement (assuming age 65), with a compound annual growth rate of 10%, your investment can be worth an astonishing R9.8 million at retirement. This can be life-changing for many South Africans. Now of course you have to consider inflation and the time value of money – but this is still an incredible way for South Africans to accumulate tax-free wealth.

4. Estate & Creditor Protection

RA: Protected from creditors and does not form part of your estate, so it bypasses executor fees and estate duty. This makes it a really attractive investment vehicle for estate planning purposes.

It is also important to note that even after retirement, and utilising your retirement annuity to buy a living or life annuity from which you start withdrawing income, you can still contribute to an additional or different retirement annuity and enjoy the same tax benefits.

TFSA: The proceeds of a tax-free savings account (the deposits and all returns earned prior to death), will form part of “property” as defined in the Estate Duty Act. This means that following the death of the holder of a TFSA, Estate Duty will be levied on this amount. 

5. Fees & Investment Flexibility

RA: Often has higher fees (including administration, advice, and management fees), potentially up to 2.5% per year for actively managed products. 

Investment choices are also regulated under Regulation 28, which places limits on certain type of assets that RAs can be invested in. The two limits most pertinent to retirement fund investors are those on equities (75%) and offshore assets (45%).

TFSA: Generally lower fees – often less than half of what an RA charges, and allows broader investment flexibility.

A very important myth to bust is the type of investment products one can access through a TFSA. And the confusion lies in the name – a tax-free SAVINGS account. Many South Africans believe that they can only invest in a savings account, tax-free. This is not the case, and there are numerous equity products available as well.

Equity has outperformed other asset classes over time and offers much more value than investing in a savings account. As a natural person in South Africa, you are also already exempt from the first R23 800 of interest per year. It makes much more sense to utilise your TFSA through equity products where all your dividends and capital gains will also be tax-free. For this reason I prefer the name tax-free INVESTMENT account.

A final word:

Ultimately, the question isn’t whether you should choose between a TFSA or an RA, but rather how to balance both to maximise your wealth and secure your retirement. A TFSA gives you the flexibility of tax-free growth and withdrawals, while an RA rewards you upfront with tax deductions and long-term protection for your retirement capital.

By strategically using both vehicles, you can enjoy the best of both worlds: accessible, tax-free compounding on one side, and structured, tax-efficient retirement income on the other. The earlier you start, the greater the benefit of compounding – and the closer you move to being part of the 6% of South Africans who can truly retire comfortably.