Using a personal share portfolio in a living annuity

By Francois Lombard, Head: Strategic Relationships and Dealmaking with Momentum Wealth

Francois Lombard, Head: Strategic Relationships and Dealmaking with Momentum Wealth

The pandemic has reminded us of two of life’s truths: That there is nothing certain, but the uncertain and that we have no control over what happens in the world. The only thing that we can control is our reaction. These uncertain times call for calm, rational thinking and cool-headed investment decision-making.

During periods of market volatility, clients should focus on their investment goal and make sure that their asset allocation remains aligned to the goal and time horizon to achieve it. Smart investing is about deciding on a long-term strategy and sticking to it. Uncertain times are especially difficult for clients drawing an income from a living annuity, which brings me to the use of a personal share portfolio (PSP) in a living annuity. 

A PSP is an investment component inside a living annuity that can be used to create a bespoke investment portfolio for a client. In the PSP, an investment manager buys and sells local and international shares on behalf of the client. Investing is truly personal with a PSP and gives clients their own personal share account as part of their investment strategy during retirement.

The PSP solution offers quite a number of advantages, including:

The fee structure of a PSP is competitive, transparent and flexible

In most cases, PSP management fees start from less than 1% a year, which can be even lower based on the value of a client’s portfolio. In most cases, it has no performance fee charges. Management fees will vary between providers and are usually negotiated between the client and the investment manager. When compared to some other investment components, the cost-benefit becomes apparent.

For example, the average Total Investment Charge (TIC) of unit trusts in the South African Equity General sector was 2.05% a year for the period ending 31 January 2022. The following illustrates the effect of this 1% management fee difference for a client with a R5 million living annuity, drawing a yearly income of 2.50%. After 20 years, the client has an extra R1.5 million in capital and would have received an extra R39 000 in income if invested in the lower management fee PSP. This example used an assumed growth rate of 6% a year for both the PSP and the comparing unit trust1.

Tax

Once invested in a living annuity, all growth, including interest income, dividend income and capital gains, are not subject to South African income tax. In contrast, a traditional PSP outside a living annuity or retirement product will attract capital gains tax (CGT) every time a share is sold. Dividends will also be subject to South African dividend withholding tax and any interest received will be taxed.

This tax ‘saving’ is the real value add when considering including a PSP inside a living annuity, especially over the longer investment time horizon where it unlocks the benefit of growth on tax-free growth earned. The CGT advantage further allows your investment manager to be nimbler and to trade when needed, like in times of market turmoil, without having to consider the effect of CGT.

Smart diversification

PSP investing presents an opportunity to diversify a client’s investment portfolio, which in turn may reduce risk by investing not only in local shares but across countries, regions, industry sectors and currencies. While the Johannesburg Stock Exchange is the largest stock exchange in Africa, offering some impressive opportunities to both local and international clients, it makes up less than 2% of the world’s market capitalisation.

This means that if a client is only exposed to local shares, they are effectively missing out on the other 98%. With client-specific investment mandates, clients and their investment manager can, if required, adjust the investment mandate to react to extreme circumstances, whereas the investment mandate of a unit trust is usually fixed and applicable to all the clients in the particular fund. 

Offshore allocation

A living annuity falls under the Insurance Act and is not subject to the investment limits of Regulation 28 of the Pension Funds Act. As such, a client can choose to invest 100% of PSP assets offshore in a living annuity depending on the living annuity provider’s offshore investment limits.

Personalised service and high level of engagement

PSPs can provide personalised services to clients where it can be tailored to an individual’s unique needs and risk-return objectives. Unlike most investment management companies, clients have direct access to the portfolio manager and client relationship managers. 

The good news is that a PSP as an underlying investment choice is available to all Momentum Wealth living annuity clients. You can give your living annuity clients’ investments the potential performance. Through Momentum Wealth, clients have access to more than 15 PSP providers. Unwaveringly, we remain committed to supporting and helping you and your clients as they face their individual challenges on their investment journey. With us, investing is personal.

1 Source: Momentum Investments, 9 March 2022

Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).

Momentum Annuities are life insurance products, underwritten by Momentum Metropolitan Life Limited, a licensed life insurer under the Insurance Act and administered by Momentum Wealth (Pty) Ltd. The information in this editorial is for general information purposes and not intended to be an invitation to invest, professional advice or financial services under the Financial Advisory and Intermediary Services Act, 2002. Momentum Investments does not make any express or implied warranty about the accuracy of the information herein.

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