How to save more for retirement – pension fund or investing directly into ETFs?

Pension Fund vs. Investing Directly in the Nasdaq

A South African Showdown

In the left corner, armed with tax breaks, creditor protection, and steady discipline: Nosipho the Pension Princess. In the right corner, chasing sky-high tech growth and instant liquidity: Lerato the Nasdaq Ninja.

These two Johannesburg besties are squaring off to answer a burning question: Is it better to grab tax savings upfront and build steadily, or go for explosive returns and handle taxes later to save more for retirement? This investment battle might just reshape how you think about your retirement game plan.

Who ends up lounging on a yacht in retirement? Let’s break it down, with facts, clear explanations, and a balanced look at the pros and cons.

Meet the Contenders

Nosipho: The Pension Princess

Nosipho is all about smart planning, tax perks, and binge-watching finance videos. She’s pouring her money into a Retirement Annuity (RA) through the Allan Gray Balanced Fund – a diversified option that’s regulated for safety.

Lerato: The Nasdaq Ninja

Lerato scoffs at the constraints of pension funds. She’s betting on high-octane growth with the Satrix Nasdaq 100 ETF, aiming for those juicy tech returns. Her vibe? “Why crawl at an average of 8.5% when you can rocket to 15%?”

Setting the Scene: The Investment Challenge

• We’re pitting these strategies head-to-head with: 
• R5,000 monthly investments starting at age 25
• Time horizons of 5, 10, 20, 30, and 40 years
• Annual taxable income: R600,000 (*marginal tax rate of 36%)
• Inflation rate: 5% (used to adjust future values to today’s purchasing power)

*What’s a marginal tax rate? It’s the rate applied to the next range of your income in the highest tax bracket you fall into. For R600,000 in taxable income in 2025/26, anything above R512,801 is taxed at 36% – so that’s your marginal rate for deductions like RA contributions.

Nosipho gets a tax rebate each year (R21,600) and reinvests it right back into her RA for extra compounding power. Lerato skips the rebate but banks on superior growth. Let the numbers do the talking!

Nosipho’s Game Plan: Retirement Annuity (RA) via Allan Gray Balanced Fund*

*This could be any pension option and is just used as an example.

This tax-advantaged vehicle reduces taxable income and grows tax-free until withdrawal.

• Asset Allocation: ~60% South African equities, ~40% offshore (stocks, bonds, property), capped at 45% offshore under Regulation 28.
• Net Return: ~8.5% annually (after fees; based on historical averages, though markets vary).
• Regulation 28 Explained: Unlike Lerato’s free-wheeling ETF, RAs are governed by Regulation 28 of the Pension Funds Act. It enforces diversification to reduce risk: max 75% in equities (local + foreign), 45% offshore, 25% in property, and 10% in commodities or hedge funds. This prevents “YOLO” bets on volatile assets like tech stocks, ensuring stability but capping upside in booming markets.
• Key Perk: Your RA is protected from creditors under Section 37B of the Pension Funds Act. If you face debt or bankruptcy, creditors can’t touch it – a massive safety net.
• Pros: Tax deductions, tax-free growth, creditor protection, forced saving discipline, lower volatility due to diversification.
• Cons: Locked until age 55 (with limited early access), lower returns due to Reg 28 caps, and higher fees.

Tax Rebates: SARS Sweetens the Deal

• Contributes R60,000/year (R5,000/month).
• Gets R21,600 back (R60,000 × 36%) as a tax rebate.
• Nosipho reinvests it, boosting her annual input to R81,600, adding ~3.2% to effective returns via compounding.

Fees and Lock-In

• Total expenses (TER): ~ 1.72% (per Allan Gray factsheet, August 2025).
• Access: Can’t withdraw before 55 without heavy taxes/penalties, except limited access via the two-pot system.

Retirement Taxes: Up to 1/3 as a lump sum (first R550,000 tax-free, then scaled rates); rest as an annuity, taxed as income (at a lower rate in retirement).

Lerato’s Strategy: Satrix Nasdaq 100 ETF

Lerato banks on technology taking over, and her cost-effective approach is to set on the riskier tech-heavy and US-centric Satrix Nasdaq 100 ETF. 

This ETF tracks the top 100 non-financial Nasdaq stocks (e.g., Amazon, Tesla, Microsoft).

• Net Return: ~14.53% annually (after fees; based on ~15.25% 20-year historical average minus 0.72% fees, though past performance is no guarantee).
• Pros: High growth potential, full liquidity (sell at any time), low fees, and USD exposure (benefits from ZAR weakness).
• Cons: High volatility (30%+ drawdowns, aka market dips, possible), no upfront tax break, dividend withholding tax (20%), capital gains tax (~14.4% effective*: 40% inclusion × 36% marginal rate), and tech-sector concentration risk.

*How is Capital Gains Tax calculated? Let’s say you sold shares at the value of R150,000 and you bought them at R100,000. So your profit or capital gain is R50,000. Deducting the annual exemption of R40,000 individuals get leaves you with R10,000 of taxable capital gain. Individuals get taxed for only 40% of this amount (R4,000) at their marginal tax rate.

Fees

• TER: 0.47% (per Satrix factsheet).
• Brokerage: ~0.25% on trades (e.g., EasyEquities), totalling ~0.72% in fees, which is low.

Taxes & Freedom

• No upfront tax deduction.
• Dividends face a 20% withholding tax, reducing the ETF’s ~0.6% annual dividend yield (e.g., R600 on a R100,000 investment) to R480 after tax. This has low impact, as dividends are a small part of the ETF’s ~14.53% total return.
• Capital gains tax on sale: ~14.4% effective rate.
• Full control: Buy, sell, or withdraw anytime.

Crunching the Numbers: The Showdown

Using monthly compounding (Nosipho’s rebate added annually), we calculate inflation-adjusted future values (real terms, today’s rands) before final withdrawal taxes. We assume constant returns (8.5% for Nosipho, 14.53% for Lerato), meaning no year-to-year market volatility, though markets are never that predictable, and actual results may vary.

Table: Inflation-adjusted Future Values (real terms, today’s Rand)

Table description: Nosipho jumps ahead in the early stages with her rebate boost, but Lerato’s 14.53% compounding rockets past like a Tesla in Ludicrous Mode, never looking back.

Tax Perks vs. Growth: Key Takeaways

• Short-term (5-10 years): Nosipho’s RA often edges out due to tax rebates and reinvestment.
• Long-term: Lerato’s ETF dominates – even after taxes, 16% crushes 8.5% + rebates.
• Caveat: If Nasdaq returns drop to ~10%, Nosipho could pull ahead, especially with creditor protection and lower risk.

Risks, Fees & Flexibility

RA = Safe but Steady

• Pros Recap: Tax-efficient, creditor-proof, diversified, disciplined saving.
• Cons Recap: Illiquid, Reg 28 limits growth, higher fees (1.72% TER).
• Limited currency exposure – a pro if the rand strengthens, a con if it weakens.

Nasdaq ETF = Volatile but High-Flying

• Pros Recap: Massive growth, low fees (0.72% total), full flexibility, USD exposure.
• Cons Recap: Wild swings (e.g., 33% drops in crashes), tax hits, tech-heavy risk.

• Best for risk-tolerant investors with long horizons. This approach requires quite a bit of risk appetite and emotional stability, and is not for investors who start out!

2025 Updates

• Two-Pot System (2024): Access up to 1/3 of new contributions (savings pot), minimum R2,000, taxed at marginal rate (36% in our example).
• Single Discretionary Allowance (SDA): R1m/year for offshore transfers, but Satrix ETF counts as a local asset.

Tax Rules: Capital Gains Tax and RA rules stable in 2025 – no major changes (always verify with SARS).

Hybrid Strategy: Why Not Both?

But why choose one if you could also opt for both? Split 50/50 for ~12.25% average returns. Nosipho’s rebates boost the RA; Lerato’s ETF brings growth. 

Pros: Balances tax perks, safety, and upside. 

Cons: Some lock-in and volatility, which could be a good thing if you are tempted to spend! 

So in our books, this could be a great strategy for many investors. However, this is solely for descriptive purposes, and we encourage you to do your own research, as your personal situation might require a different approach.

Beginner’s Guide: How to Start

Nosipho Style (RA):

• Sign up with a trusted provider of your choice
• Set monthly debits, claim rebates via SARS eFiling.
• Reinvest rebates in July for max compounding.

Lerato Style (Nasdaq ETF):

• Open a free account with a trusted online broker of your choice, such as EasyEquities (we are not affiliated).
• Search for the ETF copying the Nasdaq index and invest monthly (from R10).
• Low fees, no rebates, but simple and flexible.

Final Verdict: Tax Shield or Tech Rocket?

Nosipho shines for safety, creditor protection, tax perks, and discipline – ideal for risk-averse savers or those nearing retirement. But Lerato’s Nasdaq ETF rockets to R21.5 million (real terms) by year 40 vs. Nosipho’s R3.4 million.

In 2025, young, risk-tolerant South Africans may lean toward Nasdaq for growth to save more for retirement. If you need structure, fear creditors, or want lower risk, an RA is solid – just not private-island material. Diversify to win!

Last but not least, these calculations use rough assumptions and predictions about returns, fees, and inflation. While we’ve done our best to crunch the numbers, only time will tell how markets perform, and actual results may vary. This is not financial advice – do your own research or consult a professional to tailor a plan to your needs!

Want to know more? Join our Money Magnet Meet-Ups or take our Money Magnet’s Master Class for ongoing guidance. And most importantly: Don’t wait too late. Compound interest works its miracle for both options, but it needs as much time as possible.