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Retirement Planning
Monday, November 1, 2010
Bricks and paper...

Even with the property boom now a distant memory, some investors favour property over RAs when it comes to saving for retirement. But according to Marius Fenwick, Chief Operating Officer Mazars Financial Services, concentrating on a single asset class is always risky.

He looked at some of the pros and cons of investing a lump sum of R1.5 million into property as opposed to investing into an RA. For both types of investment, the first things to look at are entry and maintenance costs, the tax treatment on each and the risks involved.
Entry costs are around three times more for property than for an RA. For a R1.5m investment in property, transfer duties would amount to R65 000, plus legal fees. The entry costs for an investment of R1.5m in an RA would be R22 500 (1.5%).
As for maintenance costs, these can be open-ended with property depending on various factors such as the age, quality, and finishes; the quality of tenants, and directives from the body corporate in a sectional title investment. In addition, there are property rates and taxes and levies if it’s in a sectional title complex. For an RA, the ongoing maintenance cost consists of the annual asset management fee on the underlying investment. This can range from between 1,0% to 4,0% per annum depending on the fund and the manager.
Then, when it comes to estate planning, property falls 100% within the estate unless purchased in a trust, although this incurs other additional costs. RAs don’t form part of the estate, so there is a saving on estate duty of course. However, the income earned from a property investment, and the income received once an RA has matured and been transferred into an annuity are both 100% taxable.
There’s greater protection against creditors in an RA, while there’s none in property, adds Fenwick. “RAs are protected through the Pension Funds Act, whereas if you default on any of your debts your creditors can attach your property.”
If you ever sell an investment property it’s subject to CGT, whereas the assets you build up in an RA are not. However, if you opt to take one third of capital in cash once the RA has matured tax would be applicable. The first R300 000 is tax free, the second R300 000 at 18% and the third at 27%, and the balance at 36%.
Risk is another issue. Fenwick says RAs have market risk while property has indirect market risk, in that when interest rates go up or down, property values can be affected. RAs are interest rate sensitive in a positive way: if interest rates go up you earn more because it’s not taxed inside your RA.
There’s also the risk of tenant default when investing direct into property, which is becoming an increasing problem. “The balance of power has swung from landlords to tenants and getting a defaulting client to move out has become a problem,” Fenwick notes.
He says the performance of the two investments will differ over time, but what matters is the net growth in investment after all the various costs have been paid up.
Over the past 10 years, the ABSA Residential Property Index, for example, returned an annualised growth of 13.7%, the South African Annual Property Index (SAPOA) for listed property returned 17.3%, while the JSE All Share Index returned 17.2%. “The income on residential property and listed property is fully taxable. The property index does not allow for the cost to main residential property, that is, rates and taxes, maintenance and so on. Rental income on residential property is also not reflected in the Residential Property Index and should be added to the growth.”
It is highly unlikely that the above-mentioned returns over the past 10 years are going to be repeated over the next 10 in any of the three sectors mentioned. Consumers must reduce their expectations when planning, irrespective of where and how you intend to invest.
Fenwick says that RAs afford the ability to diversify investment across various asset classes from equities to bonds, cash and listed property, whereas an investment in an actual property only gives you exposure to one asset class. “Diversification is a fundamental rule of successful long term investing and while it’s fine to have properties in your portfolio, it’s best to have an RA with a diversified portfolio as well. Changes in legislation and the introduction of low cost unit trust based RAs have also swung in the favour of RAs in recent years.”

Copyright © Insurance Times and Investments® Vol:23.11 1st November, 2010
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