Every year, taxpayers are besieged with calls and letters from life assurers and other financial service providers encouraging last-minute investments in RAs (Retirement Annuities) as the tax year draws to a close. However, your financial wellbeing is likely to be better served by spending what you have available on property.
The financial services industry marketing machinery is hard at work, emphasising how you can save. I’ve fallen for this hype before.
Several times in fact, so I have money tied up in the RAs of various life assurers and private investment company Allan Gray. Years of watching how my investment returns in these RAs have fared over the years have converted me to an RA sceptic. I would rather ignore the tax deduction and invest any money I have for long-term savings requirements in property.
Barring my Allan Gray RAs, the returns have been abysmal. This is because of the obscene costs life assurers deduct from your savings when you invest with them and during the life of your investments. My Allan Gray RAs have benefited partly from the fact it did not deduct any intermediary commissions when I entered the investments directly.
Life assurer Sanlam deducted the maximum commission amounts, even though there was no adviser, and pocketed that difference for itself. My R10 000 and R40 000 RAs created in the early 2000s with Sanlam are still worth less than what I put into them today.
Not even the investment skills of Sanlam’s highly qualified, highly-paid asset managers have been enough to bring the amounts back to the R50 000 that I invested a decade ago.
Maybe those RAs will turn positive by the end of the next decade or the one after, when I might like to retire? Certainly I’ve lost faith in those RAs being anything more than dud investments.
My only consolation is that I’ve discovered this rip-off approach by the companies who set themselves up as the custodians of our nation’s savings, the people who tell us they know better than we do how we should invest our own money, early enough in my working years to come up with a fresh strategy to, hopefully, build enough money for my retirement.
At a property auction, I was reminded, yet again, of why property – particularly do-it-yourself investing in bricks-and-mortar- can be so rewarding. There, I saw a friend cash in his R50 000 or investment (deposit plus costs) in an Atlantic Seaboard, Cape Town rental flat he bought in the early 2000s.
He walked away with about R2m in his back pocket, after tax was paid and the remaining mortgage settled. During the course of his investment, a tenant effectively paid the costs for him.
There are many more residential property investment success stories like this among my circle of friends. Provided you buy at the right price, in the right area, hold property for at least five years and don’t dip into the equity by remortgaging for things other than property, it seems it is very difficult to go wrong. You can do it yourself, probably better than any highly-paid investment professional could do any investing for you.
The RA tax perk is probably well-intentioned. With South Africa’s poor savings rate and most people impoverished in their retirement, it may be the responsible thing for policymakers to keep this tax benefit in place. Unfortunately for the nation’s savers, the financial services industry has on the whole abused this perk and turned it into an advantage only for its managers and operators rather than its clients.
Maybe the finance minister should consider revising the RA perk this year, allowing others who save outside the financial services industry – like in property – to benefit from such tax perks too. Or, perhaps he should somehow penalise the life assurers, asset managers and other intermediaries who wipe out any of the tax perk’s benefits through their hefty charges? After all, it is not in the nation’s interests for ordinary South Africans to be falsely lured into thinking that offerings like RAs will massage their savings and keep them comfortable in retirement.
By Jackie Cameron.
This is an edited version of an article published by South African media company Moneyweb.co.za three years ago. My Sanlam RAs still aren’t looking any prettier today. I was inspired to republish this piece after I received a marketing e-mail from Sanlam today, urging me to invest with them.
Do you have a happier RA investment tale to share? Or an angle on property you think deserves a thorough airing? Write to me, a business and financial journalist, at firstname.lastname@example.org, or comment on this article.
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