Saving for Retirement - RA or Unit Trust?
In today’s high inflation environment and global financial crisis, saving for retirement can be difficult – but remains an imperative. Many people, however, remain puzzled about their options – should they choose a retirement annuity (RA) or unit trust?
Neill Katzeff of Mazars Moores Rowland Financial Services says that while both vehicles offer unique features and benefits, an analysis shows that as a retirement savings vehicle, RAs win hands down.
Katzeff assumed a monthly contribution of R1 000, with no escalation, for a period of 15 years. His hypothetical investor was 40 years old, and had a personal tax rate of 35%. He also assumed the money would be invested in a balanced portfolio comprising 60% equities and 40% cash, bonds and property with a 15% return on equity and 12% on the balance. The RA won’t be taxed on the cash, bonds and property, while the unit trust will be, so the RA will achieve returns of 13.8% and the unit trust will achieve 12.1%.
The money invested in the unit trust is paid with after-tax income while the RA is tax deductible. Katzeff says this means that R1 540 can be paid into the RA since the net cost after the 35% deduction will be R1 000.” No CGT was taken into account.
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UNIT TRUST R1 000 pm x 15 years @12.12% End value: R505 308 |
RA R1 540 pm x 15 years @13.8% End value: R914 863 |
On maturity, the RA will pay out one-third (R300 000) in cash, tax free, with the balance of R614 863 buying a monthly taxable income. This balance is compared to the unit trust’s R505 308, which will only attract CGT, while the RA’s monthly income attracts income tax.
“Even so,” says Katzeff ”the RA is the better option considering that the lump sum of R300 000 will also render a return. Also, the RA doesn’t fall in the investor’s estate, while the unit trust does. And the RA capital is protected and cannot be attached through insolvency.
Furthermore, an RA’s funds can only be cashed in at 55, which eliminates the temptation to cash it in and spend the money well ahead of its maturity.
“RAs are a very good, yet surprisingly underrated investment,” Katzeff concludes.
