Including direct shares in your retirement annuity

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By Schalk Louw, portfolio manager at PSG Wealth

Is it possible to structure your RA in such a way that you can invest in direct shares? The answer is yes, but unfortunately most people don’t know this.

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 annuity investment and be actively managed. This solution offers quite a few advantages, including: 

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). 

Personal attention

Unlike most asset management companies, many stockbroking companies offer you direct access to portfolio managers.

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. These fees will vary from provider and provider, and you need to negotiate the fees with your portfolio manager, so be sure to do some homework before you commit. Also bear in mind that a certain minimum portfolio size should be reached before it becomes viable and suitably diversified.

Estate planning

RAs hold many advantages for estate planning, including a potential 3.5% saving in executor’s fees. 

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 any RA is subject to Regulation 28 of the Pension Funds Act. According to Regulation 28, there are certain restrictions in terms of the weights you are allowed to allocate to different asset classes within an RA. 

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

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.