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Options regarding more than one RA

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A Fin24 user wants to rebalance his asset allocation and is not sure about  starting a second retirement annuity. He writes:

I have a retirement annuity that I started before Regulation 28 came out. I have 50% invested in equities and 50% in property.

I would like to increase my contribution, but know that, if I do, I’ll have to rebalance my asset allocation and I don’t want to lose my 50% property exposure.

I would like to know if it’s worth the risk to just go ahead and rebalance or if I should start a second retirement annuity instead so I can increase the amount I’m saving per month.
 
Marius Fenwick, chief operating officer of Mazars Financial Services responds:

There is another option. If you like your current RA you can opt to make it paid-up. That is, you would stop contributing and it will stay invested, gaining compound interest, but you won’t continue to contribute.

You could then take on another RA that would be Regulation 28 compliant and contribute as much as you would like to.

The most sensible way to ensure that you remain compliant with Regulation 28 is to choose a multi asset Regulation 28 compliant fund.

By choosing three of these funds you obtain exposure to multiple fund managers, which should reduce volatility, especially if funds are chosen that are not correlated.

These funds typically are classified as low, medium or high equity Regulation 28 funds.

In a high equity fund the equity exposure will vary between 40% and 75% and up to 25% offshore exposure can be taken within the fund.

The fund manager you choose will automatically keep the asset allocation in line with Regulation 28.
 
Be mindful of costs if you change your RA. If you have an old traditional RA through a life assurance company, chances are that you will incur penalties when you make it paid-up.

Also, be aware of the different cost structures of the various providers.

Traditional life assurance backed RAs generally incur upfront costs, which reduce the allocation to your investment drastically.

Unit trust based RAs incur costs monthly per contribution. This means that from month one you receive an allocation of around 98% towards your investment account.
 
There is, however, not a huge benefit in having more than one RA tax-wise, as your tax free lump sum in retirement - one third of your final RA savings can be taken in cash and the first R500 000 is tax free - is charged on your total amount of retirement savings, whether in one or multiple RAs.

Your annual tax deduction allowance is also based on total contributions made, irrespective of how many RAs you may have.

Depending on your age as well, I am concerned that you only have 50% equity exposure.

If you have a lot of time to save for retirement, you should try to have more equity exposure as you can afford to take on more risk.

The current economic and interest rate environment also does not favour property and a 50% exposure may be excessive.

Regulation 28 states that 25% of a fund can be allocated towards property and the fund managers of Regulation 28 multi-asset funds do have this option.

Currently very few of these managers have property exposure exceeding even 5% at this stage, which indicates that property is not favoured at this point.

You didn’t mention if you had any offshore exposure. Given the current international investment environment and South Africa’s geopolitical situation, it makes sense to take offshore exposure to the maximum of 25%.

In my view you will be better off in three high equity Regulation 28 funds (typically referred to as balanced funds) compared to your current portfolio.

Of course the rule of thumb is that you should try to put aside around 15% of your gross income towards retirement savings per month.

So, if you do want to keep your current RA and boost your retirement savings, you could put the additional money directly into unit trusts if you have reached your limit of tax deductibility for RAs.

These are discretionary though, which means you can access the money before retirement.

If you are able to be disciplined, however, you will benefit from limited asset allocation restrictions.

- Fin24   
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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