Retirement Annuity vs Tax-free Savings Account vs Bond: Where Should Your Extra Money Go?

You've created some breathing room in your budget. Maybe you've gotten a raise, paid off your car, or finally gotten some big expenses under control. Now you're facing that R5,000 monthly question: Should you boost your retirement savings through your retirement annuity, open a tax-free savings account, or chip away at your bond faster? 

With interest rates at their highest in 15 years and the new two-pot retirement system changing the game, it's worth taking a careful look at your options. Let's break down what you need to think about. 

First, Ask Yourself These Questions 

Before diving into the options, consider your current situation: 

• How confident are you about your emergency savings? 
• What other financial commitments are you juggling? 
• How important is having access to your money? 
• What's your current tax situation?

Your answers will help guide your decision.   

Understanding Your Options - Bond vs TFSA vs RA

Extra Bond Payments: The "Sleep Well" Choice 

With prime at 11.25% (as of January 2025), extra payments toward your bond can significantly reduce the interest you pay and your loan term. Since South African home loans typically have floating rates, your interest rate will change as the prime rate changes. This means the actual interest you save through extra payments will depend on future interest rates. If interest rates stay high for long, that can add up to a lot of interest saved. 

Each extra payment reduces your outstanding balance, which means you'll pay interest on a smaller amount going forward. Plus, you're building up equity in your home that you could access later if needed. 

Retirement Annuity: Tax Benefits Now, Growth for Later 

RAs have gotten more interesting since September 2024 with the new two-pot system. Here's what makes them worth considering: 

• You get tax back now (up to 27.5% of your income) 
• Up to a third of new contributions can go into an accessible savings pot 
• The rest grows tax-free towards your retirement 

For perspective: if you're earning R800,000 annually, putting that extra R5,000 monthly into an RA could reduce your tax bill by about R23,400 per year. That's like getting paid to save for retirement. 

Tax-Free Savings Account: Zero Tax on Growth 

TFSAs are powerful because you never pay tax on the growth - no income tax, no dividends tax, no capital gains tax. You can put in up to R36,000 per year with a lifetime limit of R500,000 of contributions.  

But here's the catch many people miss: if you withdraw money, you permanently lose that portion of your lifetime contribution limit. Think of it as a one-way door - once you take money out, you can't put it back in above your remaining limit. 

How These Options Play Out

Let's look at a common situation: You've got a 20-year R1.5 million bond and are managing to save an extra R5,000 monthly, every month. 

If it all goes to your bond*: 

• You could save more than R1 million in interest paid over the course of the bond. 
• You could cut about 9 years off your loan term, which means your bond payments will stop sooner. 
• Build equity you could access if needed. 

* Assuming a fixed prime rate of 11.25%, 20-year loan duration, and the ability for the R5 000 payment to pay off the principal without penalties. As interest rates change, the values above will also change. 

If it goes to an RA: 

• You can reduce your annual tax bill by up to R27,000, depending on your income tax rate. 
• You have limited access to your savings through the two-pot system for emergencies 
• The R60,000 you save every year will help you build long-term retirement savings in a tax-efficient way.  

With a TFSA: 

• The maximum annual TFSA contribution is R36,000 as of 2025. In other words, you will need to invest the balance, R24,000, in some other way. 
• All growth in the TFSA is tax-free. No capital gains tax, no income tax, no tax on interest earned. 
• You have full access to your money (but remember the contribution limit impact) 

Remember that for RAs and TFSAs the main determining factor of success is their returns and their fees over time. With your bond, the prevailing and expected future prime interest rate determines how effective it is to contribute more.  

Do you know what you are paying in fees for your investments? If not, you should request a free comparison report with 10X to find out what exactly you are paying and whether you could do better. 

Helping You Make Your Decision 

 As one of South Africa's most prominent independent investment managers, with over R50 billion in assets under management, 10X Investments offers tools to help you understand your options: 

1. Our Tax Calculator shows potential RA tax savings 
2. Our RA Calculator helps to see whether you will save up enough towards your retirement. 
3. Our investment consultants can explain our various investment products and funds, helping you make an informed decision about your future.

While we can't tell you exactly what to do - that depends on your unique situation - we can help you understand these options better. Use our calculators to run your numbers, or speak with one of our investment consultants about our products and how they might fit into your plans.