Question:
I save about 15 percent of my cost to company (this is about 20 percent of my basic salary) each month. The savings consist of my pension and retirement annuity (RA). I feel like I am putting too much (I contribute R2200 a month) in my RA, even though there is a tax benefit.

Considering this global crisis, should I not reduce the RA and play the stock market myself or put extra money into my bond? Is there a cost to reducing your RA?

Answer:
This is a question that is undoubtedly playing out in many investors' minds and in market times such as these, the natural train of thought is to question whether one is throwing good money after bad.

There are a number of factors that impact on these types of decisions, but the overriding factor comes down to a well-known principle known as rand cost averaging (RCA).

(Click here to learn more about Rand Cost Averaging)

So what is rand cost averaging? Rand cost averaging allows investors to buy more units per rand when markets are down, thereby allowing magnified upside when the market rebounds. There is little doubt that there are many good shares currently trading at bargain basement prices and the longer the uncertainty and volatility exists in the markets, the more cheap units a recurring investor will be able to accumulate.

Therefore, for the average client who does not have the capital or stomach to speculate, continuing with your regular debit order savings could be the closest you’ll come to 'playing' Warren Buffet and gives your wealth creation an undeniable fighting chance.

With this said and done, you may be asking why you should depend on this through your RA and/or pension as opposed to D.I.Y on the share market. Well, although I can’t say with absolute certainty that you couldn’t do better, there are some pretty hefty factors that stand against you.

Firstly, tax is a major consideration. You mentioned the tax advantage and this is not something to be merely overlooked. It benefits you on two levels — first, upon the tax deductibility of contributions (subject to certain maximums) as well as within the fund. The latter is something that has incredible potential to maximise future capital values. Essentially, all growth within a retirement fund is free of tax. So if one were to gain just two percent in performance per annum from this tax saving, it would result in the fund’s final value doubling in 36 years time. Considering that you are essentially invested from now and well into retirement, this becomes a very real benefit.

This is in stark contrast to the potential impact of SARS seeing you as a 'trader' while 'playing the market' and having all gains taxed as gross income (18 percent to 40 percent).

So even if you were to outstrip the professional asset manager by some large margin, chances are that tax would have the last laugh and put you in a net negative position.

With that said, this should not deter you from providing some form of medium-term investment for yourself. This could be achieved by investing in a unit trust or endowment structure and thereby having the benefit of selecting a fund that represents your desired objectives while having the strategic and tactical decisions being made by a qualified asset manager.

The bond question should be approached in the same vein — it is hugely beneficial to expend disposable income into reducing your debt but should not be in exchange for your long-term retirement objectives.

In conclusion, the general perception of the markets currently is that it is being driven 30 percent by fundamentals (pure logic) and 70 percent sentiment (emotional bias). Ask yourself whether you would rather make logical responses to the market or emotional ones. If you chose logical and fully understand what has been discussed above, then there’s a very strong argument for sticking exactly where you are.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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