How to save for retirement

There are four basic retirement funding vehicle that each offer different tax advantages to encourage you to save money for retirement.

Look at the Retirement Product Comparisons Tool to see the following four funds in more detail:

  • Pension fund
  • Provident fund
  • Preservation fund
  • Retirement annuity fund.

To understand the tax benefits of using retirement funds, you need to know the difference between pre-tax contributions and post-tax contributions.

In a pension fund, your contributions are tax-deductible (up to 7.5% of your fund salary). This means your contributions are taken off your salary before the amount of tax you have to pay is worked out. In other words, you are saving for retirement and paying less tax.

Pre-tax contributions are made before tax has been deducted from your salary.

Gross monthly salary

= R10
= R750
Taxable income
Tax @ 25%
= R9 250
= R2 313
Net monthly salary = R6 937

At retirement you can take up to one-third of your retirement benefit as cash. This will be taxed. At least two-thirds of your benefit MUST be used to buy a pension from an insurer, which gives you a monthly income when you retire.

In the provident section, your contributions are not tax-deductible. This is the reason your employer normally pays its contributions to the provident fund.

Post-tax contributions are made after you have paid tax on your monthly salary.

Gross monthly salary
Taxable income
Tax @ 25%

= R10_000
= R10 000
= R2 500
Monthly salary
= R7 500
= R750
Net monthly salary = R6 750

At retirement, the full value of your retirement benefit can be taken as cash. If you take it in cash it will be taxed. You can choose to use part or all of your retirement benefit to buy a pension from an insurer, which gives you a monthly income without paying lump sum tax.


* Assuming a member has a gross monthly income of R10 000, a tax rate of 25% and a contribution rate of 7.5%

As you can see, you get better benefits with pre-tax savings products than you get from post-tax savings products. Although a pension fund is a pre-tax savings product, you can also have preferable tax concessions within a retirement annuity fund.