Is an RA still a relevant savings product?

Published on 22nd January, 2020 at 10:14 am

In the midst of economic uncertainty, investors should consider the pros and cons of an RA as a retirement savings option. Read on for expert insights to help you decide whether it’s the right choice for you.

South Africa has gone through a roller-coaster ride this year. State-owned enterprises are struggling with losses and debt. Typically, when the strength of the economy comes into question, investors run for the hills and invest money abroad or in safer assets.

RAs lose out to cash

Investors in current markets are seen to be favouring interest-bearing portfolios over equities, and many industry commentators believe that this trend is set to continue.
Many clients may be asking themselves whether a retirement annuity (RA) is still a relevant investment vehicle given all our political and economic uncertainty. Ryno Oosthuizen, business development manager at Glacier by Sanlam explains: “A lot of clients are asking whether they should invest in markets and with a long-term time horizon. With an RA you take the view that you will be retiring in South Africa, and I think many are torn between not knowing whether they will be doing that in this country.”

Why RAs are still relevant

Convincing clients to invest for the future is going to be a challenge. But this is where financial planners’ true talents must come to the fore, because the reality is that the majority of South Africans are ill-prepared when it comes to planning for their golden years.
According to Sanlam’s Benchmark Survey for 2019, only 16% of pension fund members will be able to maintain their standard of living, indicating that investors are not saving enough for retirement.
This is why the advantages of investing in RAs needs to be driven home – inertia could just result in investors delaying their retirement plans and losing out on benefits such as:

• Tax breaks: “One of the biggest tax benefits of an RA is the tax deduction you as the investor receive. Along with the deduction, all the growth on the underlying portfolio in which you have invested is tax-free, which gives you the full benefit of the growth generated by the portfolio,” says Oosthuizen. Learn more about this here.
• Compound interest: Savers should be educated on the wonders of compound interest where the money literally ‘works for them’ as they earn growth on their growth. Use this free online retirement calculator to find out what you need to save monthly to reach your retirement savings goal.
• Bonuses: Some RAs, such as Sanlam’s Cumulus Echo Retirement Plan, reward you with a bonus for every payment you make. “These types of products help to incentivise investors to keep saving towards retirement.”
  But Oosthuizen stresses that investors – together with their financial planners – need to ensure that the product they select meets their individual needs and circumstances. “With the new-generation RA products, you don’t have any restrictions in terms of contributions – you can stop and start how you like. But some of the products that have bonus structures or other incentives may possibly have some restrictions on stopping and starting. Different products are suited to different needs, so always get advice before investing.”

Oosthuizen adds that they may not suit everyone. “With an RA you don’t have any restrictions in terms of contributions – you can stop and start as you like. But some of the products that have bonus structures or other incentives may possibly have some restrictions on stopping and starting.”

One of the major considerations when deciding to invest in an RA is the fact that the money can’t be accessed until age 55 and this may be a concern for investors skittish about the future. However, if you as an investor decide to formally emigrate, the full value in the retirement annuity (minus tax) can be withdrawn.

An RA can, however, always be enhanced with other products such as Tax-Free Savings Accounts (TFSAs), which allow savers to invest R33 000 a year without paying tax on any growth. Pick the right one for you with this guide.

Unit trusts, on the other hand, while not as tax-efficient, can also provide a diversified and affordable alternative if clients want to have a portion of savings that’s easily accessible.

The positives in the economy

It’s important to reiterate the message that investments will go down as well as up, and while there is a lot of uncertainty in the economy at the moment, it’s typically equities that outperform most other types of investments.
Investments like RAs may have some drawbacks and restrictions, but they also have many advantages. Ultimately, the sooner savers in invest in them, the less they’ll have to stress about being comfortable in retirement.