Pay less, keep more: structuring retirement income for the best tax outcome

You have worked hard and saved diligently towards the retirement you’ve dreamed of. The day you down tools or pick up your side hustle permanently, you should ideally make sure that those savings now work just as hard for you. Structuring your retirement income wisely can help you keep more of what you’ve earned, while still providing for your loved ones.

Tax and saving for retirement

South Africa offers generous tax incentives for retirement saving. Contributions to retirement annuities, pensions, and provident funds are tax-deductible (within annual limits), and the growth within these funds is sheltered from tax. Tax-free savings accounts (TFSAs) also play a role: although capped, all growth and withdrawals are tax-free.

A Treasury analysis shows just how powerful these incentives are: after 10 years, R10 000 invested in a retirement fund can grow to about R7 500 more than the same amount in a TFSA, and nearly double that of an interest-bearing account.

But once you start drawing an income, the picture changes. According to Fareeya Adam, CEO of Structured Products and Annuities at Momentum Wealth, retirees must understand the impact of tax on your income. Income from compulsory-purchased annuities are taxed in full at your marginal rate, like a salary, whereas only the interest portion of the income from voluntary-purchased annuities may be taxable, meaning little or no tax may be payable, when used in retirement.

Compulsory vs discretionary annuities: different tax rules

The way your annuity income is taxed depends on whether it comes from compulsory retirement savings or discretionary (personal) savings. The distinction is important, as it is guided by different parts of South Africa’s tax legislation.

• Compulsory annuities: Purchased with savings from retirement funds such as pension, provident, preservation funds or retirement annuities. They fall under the Income Tax Act provisions that govern retirement savings, and the income you receive is fully taxable at your marginal tax rate, just like a salary. The tax threshold for people over 65 is, however, a lot higher than for those under 65 (2025/2026 tax year = R148 217 for those over 65 years vs R95 750)
• Voluntary (discretionary) annuities: Bought with after-tax money you’ve saved outside of retirement funds. Section 10A of the Income Tax Act could apply here, allowing only the interest portion of the income to be taxed. The capital portion is tax-free, which often results in little or no tax being payable for retirees in their 60s or older.

To see the impact, consider a retiree receiving an income before tax of R60 000 a month. For a compulsory annuity, this retiree will attract a 24% tax rate. This would mean tax of R14 233 for a person between 65 and 74 and a net income of R45 767 a month. For a voluntary annuity, if Section 10A applies and we assume that the interest portion is R31 786, his or her income jumps to R55 494 every month.

That’s a difference of R9 727 in take-home income every month simply due to the tax treatment.

The below table summarises the difference between the tax treatment of compulsory and voluntary annuities clearly:

Income and legacy combined: combining a life annuity with life insurance

While understanding these tax distinctions for your own income security is crucial, many retirees are equally concerned about leaving a financial legacy. Momentum Wealth’s Capital Protector is designed to address both income security and legacy planning.

“The Capital Protector is a back-to-back product – it is a life annuity together with life cover. A key differential about this life cover is that there is no underwriting – so no medical tests or medical questions,” Adam explains. The design means clients can enjoy a guaranteed income while knowing a lump sum will pass to their beneficiaries.

Also important to note is that Momentum has introduced lifetime guaranteed premiums on the life cover portion, for clients aged 60 and older. “This means that the premium specified at the start of the policy will be what the client pays for as long as they live. And that adds to the complete certainty clients can have about their future financial situation,” says Adam.

Estate planning and family wealth transfer

Beyond income and tax, estate planning is a crucial consideration. On death, annuities are dealt with differently depending on their structure. With a life annuity, payments generally stop when the annuitant dies – unless a joint life or guaranteed term was chosen, in which case the income continues to a spouse or for the remainder of guaranteed period.

If the income continues to a spouse, Section 10A ensures the favourable tax treatment carries over, with only the interest portion being taxed if it was a voluntary annuity. If the income is paid to someone other than a spouse, however, the full income becomes taxable in their hands.

Capital Protector’s life cover payout can help preserve wealth across generations.

“If the beneficiary is a spouse or partner according to the definitions of law, then there are no executor’s fees and no estate duties,” Adam points out. With estate duty at 20%, the benefit could be significant.

Even when the beneficiary is not a spouse, executor’s fees are avoided because the lump sum is paid directly, though estate duty still applies.

Advice meets your context

Decisions around annuities, tax, and estate planning are rarely one-size-fits-all. They depend on health, family circumstances, spending priorities, and future uncertainties such as medical costs. That’s why Adam emphasises the role of advice.

“Your context at age 60 may be different from your context at age 70,” she notes. She explains that retirement is not static; circumstances and priorities shift over time, which is why ongoing advice is so valuable to guide clients as their needs evolve.

Brought to you by Momentum Wealth.

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