Weighing up the pros and cons of RAs and tax-free investments

I pay tax at the 45% marginal rate and want to invest R3,000 a month for the next 10 years.

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Should I use a retirement annuity (RA) or a tax-free investment for my savings? I do not own any tax-free or retirement investments.It depends on what is more important to you - flexibility or tax efficiency.

The tax-free investment option

Tax-free investments are appealing because of their simplicity. All the growth is free of tax. Withdrawals are not taxed. There are no access restrictions and no future tax consequences to manage. Unlike retirement investments, tax-free investments are not subject to Regulation 28, which gives you more investment freedom and, potentially, higher long-term returns. The main limitation is the contribution cap of R36,000 per year, with a lifetime limit of R500,000.

The RA option

RAs offer a benefit that no tax-free investment can replicate: the upfront tax deduction. Contributions to an RA are deductible up to 27.5% of your taxable income. For an individual paying tax at 45%, this represents a significant immediate saving.