The benefits of direct shares

MANY investors are not aware that they can hold individual shares directly (as opposed to holding them via unit trusts or life funds) as part of their retirement investments.

Whether it is a retirement annuity or a preservation fund, several financial services providers offer you the opportunity to enjoy the benefits of a direct share investment, while still enjoying the tax advantages of a retirement wrapper.

In addition, you can have a private share portfolio in a living annuity.

Should you decide to invest directly in shares as part of your retirement portfolio, you will enjoy several benefits.

You will have the opportunity to be more involved in the choice of shares as you can usually talk to a portfolio manager to exchange ideas about portfolio construction. There is potential for enhanced long-term returns as well.

Shares tend to outperform other asset classes in the long term, making a focused portfolio tailored to your preferences a great option with the possibility of better returns.

You can also choose to be as involved as you want to be.

Tax exemptions apply to retirement products – regardless of whether you hold shares or unit trusts as your underlying investment.

This means you don’t pay tax on interest, dividends or capital gains while invested.

If you have a retirement annuity you can also claim a portion of your contributions back from tax.

Keep this in mind as we have now entered a new tax year.

You also get transparent daily pricing when you invest in shares.

Most companies will price your portfolio daily, so you always know where you stand, but it is important not to let short-term market movements distract you from your long-term investment goals.

If your share portfolio is part of a retirement wrapper, your total portfolio of assets must still comply with Regulation 28 of the Pension Funds Act.

This means that a maximum amount of 75% of the total contract value may be allocated to your private share portfolio.

Overall, your portfolio can have a maximum equity exposure of 75% and a maximum exposure of 25% to offshore assets.

Regulation 28 is not applicable to living annuities.

However, financial services providers usually have stipulations regarding the type and proportion of assets that you should hold.

PSG, for example, requires you to invest a minimum amount of 2.5 times your annual annuity income in other assets such as unit trusts, multi-managed funds and money market instruments to meet income obligations.

The remainder may be invested in a private share portfolio. Both local and international shares may be included.

Although you won’t be able to invest in derivative instruments, you can include both local and international shares in your private share portfolio.

You can also hold cash in your portfolio. Share selection takes your risk appetite and preferences into account, within the limits of Regulation 28.