Question:

I have been doing a little investigating and am yet to find one person who is thrilled with the way her or his retirement annuity is performing.   In some instances they are worth less than the total contributions made to date; a fact I find frightening!

I don’t know what the foolproof answer is for saving for retirement, but I am now very sceptical about RAs.

I really enjoy reading the iafrica.com business section; I read it every day!

Answer:

Possibly one of the most common myths in investing is that investment vehicles (such as RAs, endowments and unit trusts) are the key determinant of performance or returns.

In short, the investment vehicle is merely a legal and administrative platform that offers access to a multitude of funds. Return expectations are therefore impacted by the asset allocation of the fund in which you are invested as opposed to the vehicle itself.

Put differently, if you had the identical fund (and therefore asset allocation) in each of the investment vehicles mentioned above, the returns (both good and bad) would be identical. This of course assumes an equal tax position and when one starts adding the various tax benefits (or consequences), so the net return figures begin to differ. This difference is where an RA actually leads the pack due to its tax friendly nature.

Let’s look at a vehicle comparison:

From the above, it is clear to see that the RA in fact has the most tax benefits and therefore, if asset allocation was identical across the vehicles, the RA would provide the best after tax returns.

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