Best-kept secret: Direct shares in your retirement annuity | Fin24

Best-kept secret: Direct shares in your retirement annuity

Feb 20 2017 11:06
Schalk Louw

The 28th of February doesn’t only mark a very important date for most companies who face financial year-end, but also for countless personal taxpayers. Before you lose hope when thinking of the massive task that lies ahead of you, however, I would like to focus on the advantages of tax returns that most taxpayers are often not fully aware of. 

I have made several references to the Matryoshka doll (aka Russian nesting doll) in the past, by discussing how investment products often remind me of these dolls. The concept is based on one doll (or investment product) that fits into another, which fits into another, and another, and so on. Eventually, the accumulated fees attached to these “nested” products become so unattractive that the product gains nothing but a bad reputation. Although many product providers have made an effort to keep costs low, we still find that in some instances they can add up. 

Retirement annuities (RAs) are one example of this. But why? Let’s start by taking the dolls apart:

  • The costs attached to an RA itself;
  • In many cases, an RA is invested in a Fund of Funds, which as the name suggests, is one unit trust that invests in other unit trusts, that each comes with its own overhead costs;
  • The costs attached to the unit trusts used within the RA. 

So, you have all these layers upon layers of cost structures attached to the product, when all the investor actually wants is the last little doll, namely shares, property shares or bonds. If the layers aren’t managed carefully, the costs can potentially add up. Investors are still wary of RAs, but they do offer tremendous “nesting” benefits in terms of tax. 

Can the layperson structure their RA in such a way that they too can invest in the last doll called direct shares? The answer is 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 SA 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 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 many asset management companies, many stockbroking companies offer you direct access to portfolio managers. 


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 1.14% (incl. VAT), which can be reduced on a sliding scale based on the value of your portfolio, with no performance fee charges. 

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. I will discuss this in further detail in my next article, but in short, Regulation 28 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 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 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. 

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. 

Schalk Louw is a portfolio manager at PSG Wealth. 

This article originally appeared in the 16 February edition of finweek. Buy and download the magazine here.


investment  |  portfolio  |  retirement annuities

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