The benefits of direct share investments in a retirement portfolio
Grant Meintjes, head of PSG Securities.
Many investors aren’t aware that they can hold individual shares directly (as opposed to holding them via unit trusts or life funds) as part of their retirement investments. Whether it’s a retirement annuity or a preservation fund, several financial services providers offer you the opportunity to enjoy the benefits of a direct share investment while still enjoying the tax advantages of a retirement wrapper. In addition, you can have a private share portfolio in a living annuity.
Taking control of your retirement portfolio by investing directly in shares offers several benefits:
• The opportunity to be more involved in the choice of shares as you can usually talk to a portfolio manager to exchange ideas about portfolio construction.
• The potential for enhanced long-term returns. As shares tend to outperform other asset classes in the long term, a focused portfolio tailored to your preferences can offer the possibility of better returns. You can choose to be as involved as you want to be.
• Tax exemptions apply to retirement products – regardless of whether you hold shares or unit trusts as your underlying investment. This means you don’t pay tax on interest, dividends or capital gains while invested. If you have a retirement annuity (RA) you can also claim a portion of your contributions back from tax.
• Transparent daily pricing. Most companies will price your portfolio daily, so you always know where you stand.
• Safe custody of your shares.
Regulation 28 still applies
Because your share portfolio is part of a retirement wrapper, your total portfolio of assets must still comply with Regulation 28 of the Pension Funds Act. This means that a maximum amount of 75% of the total contract value may be allocated to your private share portfolio. Overall, your portfolio can have a maximum equity exposure of 75% and a maximum exposure of 25% to offshore assets.
Regulation 28 is not applicable to living annuities. However, financial services providers usually have certain stipulations regarding the type and proportion of assets that you should hold. PSG, for example, requires you to invest a minimum amount of 2.5 times your annual annuity income in other assets such as unit trusts, multi-managed funds and money market instruments to meet income obligations. The remainder may be invested in a private share portfolio.
Both local and international shares may be included
Although you won’t be able to invest in derivative instruments, you can include both local and international shares in your private share portfolio. You can also hold cash in your portfolio. Share selection takes your risk appetite and preferences into account, within the limits of Regulation 28.
