RAs not the only option

MAKE AN INFORMED DECISION: UNDERSTAND BENEFITS AND LIMITATIONS

Unit trusts, direct share portfolios and endowments can supplement traditional retirement funds.

Many contributors to a single pension or retirement annuity (RA) fund believe their options are limited to just that. However, you can use alternative vehicles to contribute towards building wealth for retirement.

RAs essentially allow you to invest for retirement savings – pretax and subject to certain limits. Like your contributions, the growth in your investment isn’t subject to tax. You only pay tax when you ultimately receive your benefits. So you postpone your tax bill and pay less tax because your income will likely be lower at retirement than while you’re working. With an RA, you can invest tax-free contributions up to 27.5%, of your annual income, capped at R350 000 per annum.

A tax-free savings account (TFSA) allows you to invest after–tax money. Unlike your contributions, you don’t pay tax on the growth of your funds or when you withdraw later. However, TFSAs only allow you to contribute up to R33 000 per year and R500 000 in a lifetime.

However, because with a TSFA you don’t defer your tax payment and you end up paying more tax than you would through a RA, the latter seems the better option tax-wise. The TSFA offers liquidity and isn’t subject to regulation 28, which limits your investment choices. However, the two products were not designed to compete, but to be be supplementary.

Alternative options

You can easily invest directly into unit trusts, or in unit trusts via an RA. An RA gives you tax savings and a measure of protection against creditors and falls outside your estate. But your funds must stay there until you retire. By going into a unit trust directly, the money is liquid, and you have more investment options (up to 100% offshore versus a 30% limit in an RA). A more tailor-made or cheaper approach, is investing in an ETF or a direct share portfolio. Note, you’ll pay capital gains tax (CGT) if you sell a share in your direct share portfolio, while a share being sold within a unit trust has no CGT. Unit trusts are therefore often more active, and have a bigger team managing the underlying funds.

One can take money directly offshore in foreign currency via international unit trusts, ETFs or direct share portfolios. Be aware of exchange control and the legislation of a new jurisdiction.

Once the money in hard currency is offshore, you don’t need to bring it back to SA. Structured correctly, this can continue for your beneficiaries after your death.

Endowments are also an option to go global. They can be structured to fall outside your estate, saving on executors’ fees and estate duty. However, they lock you in for five years. Ensure you understand the nitty gritty of the array of endowments wrappers being punted. Ask your advisor if the product suggested is fee or commission-based. This can make a big difference in fees, and eventual performance.

Andre Basson is with Brenthurst Wealth Management

A cheaper approach is investing in an ETF