Are you invested in the right product?

When deciding which investment product best suits your needs, consider when you’ll need to access your investment, how it will be taxed and what happens to it in the event of your death, says Rob Formby, director of retail operations at Allan Gray.

Different products fulfil different purposes. “Unit trusts make good medium- to long-term investments and are appropriate if you want to grow your money, but also want to be able to access it before you retire,” he says. By pooling your money with other investors with similar investment objectives unit trusts allow you access to companies dedicated to managing money. This is typically done via a range of assets such as shares, bonds, property and cash, depending on the fund’s mandate.

If you’re saving for retirement, consider a retirement annuity fund (RA), which allows you to save in a flexible, tax-efficient manner, but doesn’t generally allow withdrawals before you retire. Many RAs use unit trusts as their underlying investments.

If you’ve been saving for retirement in a pension or provident fund with an employer, and leave that employer, a preservation fund allows you to preserve and grow your existing retirement benefits in a tax-efficient manner. You are typically allowed one withdrawal before you retire.

A living annuity allows you to draw an income from your investment after you retire. “The important question to consider with living annuities is how much can you comfortably draw in a sustainable way,” Formby says.

An endowment policy has certain tax advantages, but restricts withdrawals and additional contributions. “It can be a good medium-long term investment for higher income earners with a high marginal tax rate. But your money will be tied up for five years, as that’s the minimum investment term for these products.”

Often legislation limits your choice of products. For example, if you want to preserve your retirement savings when leaving your employer, you can only transfer your money to either a retirement annuity or a preservation fund. And your choice of products can make quite a big difference to what will happen when you die, especially if you have dependants.

In the event of your death

Unit trusts are like any other asset and should be included in your comprehensive will. “Remember that South African law freezes joint accounts upon your death until your estate is wound up.”

Living annuities and endowments are technically forms of life insurance. Living annuities do not attract estate duty, they do not need to wait for your estate to be wound up, and funds are paid out to your named beneficiaries who can choose to continue to draw an annuity. Endowments will form part of your estate.

“Your RA investments are technically a type of pension fund. When you die, the trustees of all of your pension fund investments are not bound by your will and have to consider the needs of your dependants before your nominated beneficiaries. This can take some time,” Formby concludes.