Financial Planning

You CAN invest in direct shares within your RA

In recent weeks, we have busted a myth or two regarding retirement annuities (RAs), and proved the product’s undeniable benefits to investors. This week, I would like to focus more on the structure of an RA, and specifically on direct shares in an RA for those who feel that an RA does not necessarily meet their needs in terms of a more aggressive risk profile or growth objectives.

On many occasions, I have compared investments to a Russian nesting doll. The concept is based on one doll (or investment product), which fits into another, which fits into another, and so on, only to find that the costs attached to each of these ‘nested’ products are so high, that it gives the product itself a bad reputation. Many providers have made a decent effort to keep those costs as low as possible, but as we have found over the years, in certain cases these costs can still pile up.

As I mentioned last week, the retirement annuity (RA) was a prime example of exactly the type of product that investors labelled as “too expensive”, simply because:

  • of the actual costs attached to an RA;
  • in many cases, the RA is invested in a Fund of Funds, which as the name suggests, is one unit trust fund that invests in other unit trust funds. There can be advantages to the structure, but each comes with its own overhead costs;
  • of the costs attached to the unit trust funds used within the RA.

Ultimately, you have these layers upon layers of cost structures attached to the product, when all the investor really wants, is the last doll, namely shares, property, cash  or bonds. If these layers aren’t managed carefully, the costs can potentially pile up. Investors are still wary of RAs, but as we proved earlier this month, they offer incredible ‘nesting’ benefits in terms of tax.

Can the man on the street structure his RA in such a way that he too can invest in the last doll called direct shares? The answer is absolutely YES.

A Personal Share Portfolio (PSP) allows you to tailor your own bespoke share portfolio as part of your retirement investment strategy. Most RA platforms in South Africa now offer the solution for a portfolio manager to choose a selection of local and international shares, which, as a direct share portfolio, can be included in your retirement investment and actively managed. This solution offers quite a few advantages, including:

1.    Tax advantages:

No capital gains tax or income tax is payable within a retirement annuity, so you can have exposure to direct shares within your RA, without the usual tax implications attached to a separate direct equity portfolio (which does not form part of your RA).

2.    Cost-effectiveness:

The current average Total Expense Ratio for General Equity unit trusts amounts to 1.56% per year with additional performance fees attached to many of these funds. In most cases, personal share portfolio management fees start from 1.15% (incl. VAT), which can be reduced on a sliding scale based on the value of your portfolio, with no performance fee charges. Of course, platform and adviser fees will both vary, so be sure to check what specific fees you will be paying.

3.    Estate planning:

Retirement annuities hold many advantages for estate planning, including a potential 3.5% saving in executor’s fees and a maximum of 25% in estate duty.

4.    More control:

One of the main advantages of an RA that is also invested in direct shares, is probably the fact that you have more control over your investment composition. The reason for this is that that any RA is subject to Regulation 28 of the Pension Funds Act, which, in brief, means that within an RA, you will be subject to certain restrictions in terms of the weights you will be allowed to allocate to different asset classes.

Based on historical data, it is a well-known fact that shares held within an RA certainly offers the best long-term growth potential. For a young investor looking to invest in direct shares, the problem is two-fold. Firstly, Regulation 28 restricts the investment in direct shares (both locally and offshore) within a Retirement Annuity to 75%.

Another problem is that if you choose to invest in equity-based unit trust funds, you should know that very few of these funds can actually invest 100% of the fund in direct shares, simply because of cost recovery and the fact that it has to have the capacity for withdrawals to be made. By including the extra doll called unit trusts in your RA, the possibility of you reaching that 75%, is unlikely. By investing directly in shares, however, you have more control, which means that you can reach your 75% target exactly.

The good news is that this option is now available to most investors, which can definitely give your RA a huge boost in terms of performance. As always, be sure to discuss if this is a suitable investment option for you with your adviser before making the final decision.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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