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Debate: Retirement Annuity or Not (Allocation of monthly instalment to OST Portfolio)

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Super Contributor
Okay, I want to make a debate. What is your views on Retirement Annuities and private stock portfolios? Would you have both or would you allocate your monthly contributions to an OST portfolio rather (eliminating the middle man that Warren Buffett always speaks of?)
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19 REPLIES 19
Super Contributor
Werner Before you ask this question ask yourself - do I need to put aside money for my retirement? Only one answer - unless you are old money. Next question - what should I be setting aside to this end. Work it out as a percentage of your income. Do it and don't stop. (If you ask a question such as the one you posed you are going to get meaningless replies as folk trot out a combo of their worst experiences - plenty of those and their latest pet theory on where to invest, whereas this is simple autopilot stuff.. Do yourself a favour. Go to one of the quality houses that offers new generation RA's and ask them to send you a summary of their features and benefits. Then ask yourself - does this fit in to my needs - what's good , what's not so good. If you are happy you can then decide where to invest - within limits -and don't swallow all the stuff you read about costs )
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Super Contributor
RA , despite all the issues, locks you into saving...the more you get locked in , the better. Once you have payed off your bond, max your RA wrt to tax, then start your own portfolio of ETFs and shares...its never too late to save.
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Super Contributor
thanks guys, currently I have both, a very nice portfolio that's growing very well for 10 years now and a RA that's also building up well. I just think i can do much better than the RA which has costs all over the show... I am very well aware of the benefit of re-investing ones dividends and compound interest, this makes me think if one doesn't have these costs and allocates ones funds wisely (which i do) one can be vastly better off over the long term, even if one looses the tax write-off benefit of the RA. just my thoughts and I wanted to hear what you guys think.
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Not applicable
RA's are not tax exempt, they are just defer tax. You still get taxed at retirement, so in that sense, not fantastic. And I don't care what people tell me, the damn things are expensive! But they have one major benefit, in that they can re-invest your dividends across a portfolio spread - which is hard to do with your own portfolio.
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Super Contributor
I agree with the expensive part, thats why i thought it might make more sense to manage the funds myself, i think if one can do a good job over the years and stay focussed it would be more profitable. Reinvesting the dividends across the portfolio speed would be hard, but i guess the dividends and additional cash could be allocated to the best position at the time and one that offers the largest discount, etc.
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Highlighted
Super Contributor
Perhaps Im just a whack job but I prefer investing my own funds. Most people put forth these 2 things as reasons for provident funds and RA's 1: Tax saving (which its not as pointed out above its deferred) 2: Forced saving (Which for most people is a good thing) Here is my biggest concern about both 1: You dont have control which sector the money goes into. Diversification is definetly a double edged sword. 2: You cant touch the money until you are 55. Im currently 35. Given what Ive seen through historical reading a more recent (read in the last 5 years) events I believe that these things will end up close to worthless. Here is my tin foil hat opinion. The world is full of debt. Not so much household but sovereign debt. These vampiric states have to fund all sorts of obligations and the have already got tax levels in the western world close to the top of what the common man can afford. So aside from money printing (which is already happening) what else can they do. They can go after the pension funds. This is already happening albeit in more "fringe" countries. Just wait till all these funds are dorced to allocate 10 then 20 then 50% of their funds to "safe" asset classes (read government bonds) These are typically terrible things for people looking to grow their capital base. Now you cant touch your money till you are 55 (or will they raise that too ... or specify at what rate / amount you can take it out / change the tax rate on collection) By the time 55 comes your money is worth far less than what it should be and you are likely to NOT be able to retire on it. Self investing may have its downfalls but it does allow one to minimize political risk. Think it cant happen, pick up a history book. KThanxBye - P
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Super Contributor
Please lets kick some sacred cows into touch. Firstly , don't get bogged down staring at the tax. The tax break is a positive incidental to the real value driver which is regular investment and the magic of compound interest. This in turn is aided by the tax break inside the fund as it builds up. Secondly, in order to make any sense of the "high cost /expensive" concerns, you have to COMPARE the costs with the alternatives. Costs and imposts or charges exist for EVERY SAVINGS OPTION. Period. Some are higher than others - and some are lower. So if you save outside of these vehicles ( and who wouldn't?)remember that tax as an impost will be a drag on your roll-up( a fact forgotten by the majority).Finally "raiding pension funds"(???) - as the previous regime used to do - is last HALF OF THE RACE stuff - BECAUSE politicians risk losing power doing that. And they don't like that! (GOVERNMENTS looking FOR MONEY ??? Did you know that the 5000 richest families in the UK HAVE NET WEALTH that exceeds the lowest +/-12.5MILLION inhabitants of the country. I wonder where I would look?) QED.
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Super Contributor
But what still bothers me is that if you look at the long term gains one can expect from unit trusts in general, how much the managers take out for themselves, they are the ones that make more off your money than you do over time (well I am quite sure of that). Then we giving our money to them, and so far each year of my RA I managed to vastly outperform the fund. I believe even without the tax break, over time I can outperform the RA Fund.
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Super Contributor
Belief is one thing : in this case facts are another . Best you deal with both? Creating a FUTURE paradigm out of a couple of year's experience "doing something else -as in running a share portfolio" is....well.... risky. For goodness sake ; get hold of some meaningful comparisons regarding your TER's, see what your fund actually costs as well as its basket - and stop comparing boats with cars...returns come with risk and the profile of a retirement fund is not ever going to look the same as a share portfolio? - in the end its your money and its your choice but there is no rewinding of the tape possible....Returns on the exchange this year??? whatcha think - likely to be muted compared with the last few years? yaah....I am not buying any champagne.... have fun anyway
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Super Contributor
I guess the risk of the share portfolio vs the RA depends on how its created and run and the competence of the person managing it. I just think one could get a very stable portfolio going (similar to the Allen Gray Balanced Fund) without the fees and over time (20 years) possibly make more money...
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Super Contributor
Werner, this is my last comment on this. At the end of all this you come back to say you can try to replicate a retail equivalent of an RA Balanced fund??? Well that no- one can dispute. Yes, you can row across the Atlantic on your tod - but I would rather fly - cheaper in more ways than I could count! I am sure you are right "one could get a portfolio going" - or similar - but firstly its not a registered fund - no tax breaks and secondly why should a retail investor's costs be lower than an institutional investor? ( And this ignores all the resources/ expertise / research /techie stuff). Depressingly I am left with the feeling that you think the costs are the clincher - NO its the whole deal that you need to look at and that means you have to ask questions about costs etc and remember that not everyone is the same....I suggest you cast your eyes around and find someone whose mandate, stats, management ethics , costs and style fits in with what you want - eg - Coro , AG , Piet , Foord.. etc. Good luck and let us know how you go...
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Super Contributor
its all about discipline: if you have it then DIY, if you dont then RA...
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Super Contributor
the issues about cost and tax etc etc are common to both and peripheral...
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Not applicable
Well, I'm not half as smart as anyone of you, but in my opinion my RA is an "if all else Fails" portfolio. Lets say you make a huge mistake somewhere down the line and blow up your portfolio(unlikely when investing for the long term but it happens) or you get liquidated(sure you cant protect in different entities) or whatever might happen. I am fairly certain I can outperform a big fund. Or a simple ETF portfolio certainly will over time. For me its a form of diversification and the reason I do it with a potion of my investable income. And the compounded growth on the tax saving providing you reinvest it will probably amount to something over time?
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Super Contributor
Great subject Werner...OK Guys...my acid test story...I am an end product of RA's and was also an investor in the market, all of my working life... I was able to retire early (55) after a corporate career because I had both....A RA gives you an entry into a Living Annuity pension option, where you can effectively dictate what you want to withdraw from it for your retirement needs... also you can decide on what market exposure you want with the capital....and more importantly you can decide on who gets the left overs after you die....Proceeds of Living Annuities (LA's) do not form part of Estate duties. This is a seriously tax efficient route, expecially if you can keep your other assests below the current R7 million threshold, for estate duty reasons. You do however need an RA or a decent pension to ultimately get into a LA. My two cents worth.
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Super Contributor
Thanks guys for the discussion. It seems that some people tend to get a bit upset with some comments, that wasn't the intention, it was just supposed to be a friendly debate about two options. Thanks again for all who contributed.
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Super Contributor
Thanks guys for the discussion. It seems that some people tend to get a bit upset with some comments, that wasn't the intention, it was just supposed to be a friendly debate about two options. Thanks again for all who contributed.
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Happy
Contributor
Good and insightfull discussion Werner. Just a few things, I do not know what your setup at home is, but looking at a worst case scenario where you suddenly pass away. Would your widow and kids be better off if your accumulated savings were in a RA or a self managed portfolio? RA's are tax efficient and in my opinion will leave your loved ones in a better position if you die, because they are not going to pick up the portfolio where you left off. Best bet in my book is to have a RA upto the tax threshold which is about 15% of your income IIRC, leave that as the stable low risk investment and then have a portfolio with which you can take higher risks and even outperform the RA.
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Super Contributor
yep agree, dont forget the bond repayments as posted above: "Once you have payed off your bond, max your RA wrt to tax, then start your own portfolio of ETFs and shares...its never too late to save."
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