Retirement annuities (RAs) and tax free savings accounts (TFSAs) are two savings vehicles offering people tax benefits. However, their structures differ making them suitable for different savings needs.

The primary focus of an RA is to save towards retirement through a tax efficient investment, which can only be accessed from the age of 55, but usually at retirement. In contrast, a TFSA is for anyone looking to save with any goal in mind and can be accessed at any time.

Retirement annuities

In 2016 retirement reforms were signed into law, which saw changes to the legislation around RAs. You are now able to contribute up to 27.5% of your taxable income to your RA, with a yearly limit of R350 000. This contribution can be made as a monthly deduction or as a lump sum per year.

To access the funds from an RA, you must be at least 55 years old and you have to retire to access your investment.

One of the tax benefits of an RA is that you are not taxed on the return of your RA investment until retirement. Upon retirement, the first R500, 000 of your RA funds is not taxed.

Tax free savings accounts

Unlike an RA, a TFSA can be accessed at any time, however, you are not allowed to replace the funds once you have withdrawn them. TFSAs have both yearly and lifetime limits. The yearly limit was increased this year to R33, 000 per year, while the lifetime limit has remained at R500 000. These limits exclude any interest earned on your investment.

As with an RA, the interest earned on your TFSA investment is not tax.

While saving is important, many South Africans struggle to make ends meet during the current tough financial climate.