Are RA benefits worth the cost?

2012-05-26 13:10

Phil writes:
My wife and I have just turned 30, and we are teaching overseas. We plan on returning to South Africa and we will also be retiring there.

Is it worth investing in a retirement annuity (RA) We will not benefit from the tax deduction and will be investing with after-tax money. We are considering investing in Coronation unit trusts instead.

Maya replies:

While most people focus on the initial tax break with an RA, the underlying investment in an RA does not pay tax on any dividends and interest in the fund, and there is also no capital gains tax.

Rowan Burger from Liberty has done some calculations on the impact of these taxes and has calculated that over a 40-year period, your total lump sum would be 12% higher if you did not have to pay dividend or capital gains tax.

So the question is whether this gain is offset by the additional costs of an RA versus a unit trust. Coronation is an excellent company to use for comparison as it offers both unit trusts and RAs.

Coronation charges NO additional fees for the RA platform. In fact, it subsidises the 0.2% fee.

The only fee you pay is the yearly fee of the underlying unit trust, which is around 1.25% in the case of the Coronation Balanced Plus Fund.

So, in fact, your fees would be identical whether you invested in the unit trust or the RA, yet you would receive the tax benefit
of no capital gains tax or dividend tax.

However, an RA is not flexible and you would not be able to withdraw it until you reach the age of 55.

At that stage, you would have to convert two-thirds into an annuity income. You need to decide if you are prepared to lose flexibility in order to have the tax benefit.

For many people, the discipline of not being able to access the funds is half the reason they invest in an RA.

You are also limited to investing in funds which meet Regulation 28 requirements, which means that your total exposure to equities is limited to 75%.

However, that is not necessarily a bad thing given the volatility of the markets.

Coronation’s product is particularly inexpensive and a similar comparison cannot be made with all RAs, especially a traditional RA with an underlying policy where fees can be prohibitive.

Also, if you use an adviser, then additional advisory fees would apply, although this would also be the case with a unit trust.

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