By Thomas Berry, Head of Sales at PSG Wealth

For many South Africans, a year-end bonus offers an annual opportunity to exhale, catch up on debts, and spend a little more frivolously over the festive season. But what if we shifted our focus from short-term fulfillment to long-term gain?

This year, instead of seeing your bonus as additional disposable income, look at it as a wealth accelerator. By investing a portion of it in the right way, you can fast-track your progress towards long-term goals such as home ownership, education, or even an earlier retirement, without having to cut back on your lifestyle.

The key lies in how you use the tools available to you, particularly retirement annuities (RAs) and tax-free savings accounts (TFSAs). Both offer tax-free growth while your money remains invested, which means there is no tax on the interest, dividends or capital gains in either of these investment vehicles. Naturally, the less tax you pay on your investments, the faster they compound over time.

Contributing part of your bonus to either of these options is, therefore, one of the most effective ways to build long-term wealth.

Retirement annuities: your long-term growth engine

By contributing to an RA, you can deduct up to 27.5% of your taxable income each year (capped at R350 000), effectively lowering your tax bill while building your retirement fund. Those tax savings can then be reinvested to further accelerate growth.

An RA provides tax benefits, estate planning advantages, and creditor protection, making it an ideal vehicle for long-term retirement savings, with access typically restricted until retirement age (currently 55) except for specific circumstances. Under the new two-pot retirement system, investors will also have limited access to a portion of their savings while preserving the rest for retirement.

This enforced discipline keeps your money invested and compounding for decades. When the time comes to retire, only a portion of your lump sum is taxed, and any investment growth along the way is completely tax-free.

Tax-free savings accounts: flexibility with purpose

While RAs focus on long-term retirement planning, TFSAs offer flexibility for medium-term goals. You can contribute up to R36 000 a year, up to a lifetime limit of R500 000, and all interest, dividends and capital gains are tax-free.

Because funds can be accessed at any time, a TFSA is well-suited for goals such as funding a child’s education, paying a home deposit or creating a safety net for future expenses. However, withdrawals permanently reduce your contribution limit – so it’s important to plan carefully before dipping in.

Another advantage of TFSAs is the ability to invest across asset classes, without the restrictions that apply to RAs under Regulation 28. This gives you the freedom to tailor your investment strategy according to your goals and risk appetite.

Turn a once-off reward into lasting progress

Using your bonus to invest doesn’t mean giving up life’s pleasures. It means balancing reward and responsibility in a way that benefits your future self. Allocating even a fraction of your bonus towards an RA or TFSA can have a measurable impact over time – especially when compounded annually.

The graph below illustrates just how powerful compound interest can be. At age 20, investor 1 starts saving with a monthly contribution of R500. Investor 2 starts saving at the age of 35 and contribute R2 500 per month – five times as much – in order to end up with the same amount at retirement.

While this scenario demonstrates the benefit of starting as early as possible when it comes to saving for retirement, the best time to begin investing is right now. It is never too late to start saving for your future. So, this festive season, make your bonus work as hard as you do, and reap the rewards for years to come. A qualified financial adviser can help you determine how much to allocate, which product suits your goals, and how to strike the right balance between living well today and building for tomorrow.