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Listen: Consider the post-retirement impact of your investment strategy

by | Jan 27, 2023

In this podcast, I chat to certified financial planner Wynand Gouws, wealth manager at Gradidge Mahura Investments and author of To 100 and Beyond. He argues that a retirement strategy aimed at optimising only pre-retirement tax savings is short sighted, and that not enough time is spent on considering the post-retirement impact of investing only in retirement funds.

Conventional wisdom says that contributing to retirement funds (pension funds, provident funds, and retirement annuities) is the most prudent investment that you can make. This view is often anchored in the tax deductibility of these investments ‒ investors can deduct retirement fund contributions of up to 27.5% of their taxable income (up to maximum of R350 000).

This tax deduction reduces your taxable income before retirement and provides a “guaranteed” return in the form of a tax rebate.

Even though contributing to a retirement annuity, pension fund or provident fund, is extremely tax efficient before retirement, these products are punitive post retirement, because all the post-retirement income is taxable.

To illustrate the punitive impact of only using retirement funds as a vehicle for retirement savings, we consider two examples. In the first example we consider an investor who earns R60 000 per month, and in the second example an investor who earns R100 000 per month. In both examples the investor is 34 years old, plans to retire at age 65, and is contributing the full 27.5% to their pension savings.

We consider five scenarios in terms of how these investors can contribute towards pre-retirement savings:

Scenario 1
No retirement fund, only invests in tax-free savings and unit trusts. We assume the maximum allowable contribution to a tax-free savings account, with the balance invested in a unit trust fund.

Scenario 2
100% invested in a retirement fund

Scenario 3
Half of the contributions invested in a retirement annuity, with the other half split between tax-free savings and unit trusts. Again, we assume the maximum allowable contribution to tax-free saving with the balance invested in a unit trust fund.

Scenario 4
100% invested in a retirement fund with the tax savings reinvested, first in a tax-free savings account up to th emaximum allowed, and the rest put into a unit trust fund.

Scenario 5
Half of the contributions invested in a retirement annuity, with the other half split between tax-free savings and unit trusts, with the tax savings reinvested.

The post-retirement analysis

We then analysed what the sustainable income would be for each scenario, from retirement age to age 90. The results are shown in the chart below.

It is evident that the “best” solution (particularly for the person earning R100 000 per month) is not using a retirement fund. For those earning a lower income, using a retirement fund in combination with a tax-free savings and unit trust investment also yields a good outcome. For both investors, choosing only a retirement fund gives the worst result.

Even though the above may sound counter-intuitive the answer boils down to the fact that by only investing in retirement funds, all of your post-retirement income is fully taxable. In our examples, the investor would pay tax of 20% and 28% respectively.

By investing in only tax-free savings and unit trusts before retirement, the investor significantly reduces their tax rate after retirement ‒ to 4% (an 80% tax saving) and 12% (a 57% tax saving) respectively.

The unit trusts investment does attract capital gains tax and tax as a result of interest, but pernsioners get a large interest exemption, and capital gains are taxed at significantly lower rates than income.

In addition, tax-free savings accounts and unit trust investments are not restricted by regulation 28, which places severe restrictions on where retirement funds can invest their money. So money put into tax-free savings accounts and unit trusts can be invested much more aggressively. We have assumed a 1% higher return for these investments.

With less money going to the taxman in the 25 years after retirement, the investor can enjoy a significantly higher post-retirement income.

This analysis reinforces the importance of understanding tax both pre- and post-retirement, and implementing a retirement strategy that provides diversified income after retirement that specifically optimises for tax. This is even more relevant in a world where people are living into their 90s and 100s.

The retirement strategy needs to take into consideration the other benefits that retirement annuities provide, including the fact retirement funds are not included in your estate and therefore reduce your estate duty, and are protected against creditors. Also, there are no executors’ fees on retirement assets.


  1. Very useful article Thanks. So much to learn & understand.

  2. Hello, thank you for this. Very insightful. I know of someone who does this and could not understand why she would not invest in a RA, I see now why.

    I am just not clear on the tax saving reinvested part, what is this?

    • I just want to be clear that an RA is still a relevant product but it depends on what other tax-exempt products you already have. As I am self-employed I use an RA, but I also have a TFSA and discretionary offshore funds. If you already have a pension with a company then it makes sense to first use your Tax Free Savings Fund allowance before an RA. You want to build up retirement capital that is more flexible and tax effective in retirement. It is about having more than one investment for retirement. In terms of the tax benefit of an RA, you only really benefit if you invest your tax rebate. If you have an RA, the contribution is deducted from your taxable income and that is usually paid as a tax rebate. If you then invest that rebate into the RA or any other investment, then you got the taxman to pay for the contribution. Does that make sense?

  3. Hi Maya

    Please do. It’s an important consideration for me as I approach retirement. My email address is as provided.
    Kind regards

  4. Thank you. This is a surprising outcome. Can you please provide some more details? How are the pre-retirement contributions treated in Scenario 1 compared to Scenario 2? Could you please provide a link to the spreadsheet/model?

    • The article showed the various workings but I can email the original document from Wynand

  5. This article has confirmed what I suspected for a while and have been meaning to undertake a similar exercise. The number of variables seemed too many for a layman like myself to contemplate any semblance of realistic or rather accurate calculations. Thank you so much for what must have been some effort in completing such an exercise on behalf of Joe Public!

    • Appreciate the feedback! Retirement planning is so important but I think most of us just sleep walk to it

  6. Hi, interesting point of view. And a bit of a surprise as I never really considered this. Could you please post a link to the article?


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Maya Fisher-French author of Money Questions Answered


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