Could you please advise if you would recommend a retirement annuity (RA) or an investment via ETFs [exchange-traded funds] for a long-term investment for someone who does not get the tax benefit of an RA due to working outside of South Africa?
The key benefit to a RA is the tax benefit. If there is no tax benefit to an investor, then I do believe there are more suitable structures to invest in. Having said that, if you are planning to return to South Africa and retire here, then it may be a good idea to consider a RA.
If you will not be retiring here in South Africa, there are some reasons why investing outside of a RA would be more suitable.
An RA also comes with Regulation 28 constraints which restrict how you invest your funds both from an asset allocation and offshore exposure point of view. Regulation 28 forces the investor to take less risk in their portfolio. This could be seen as a negative to many investors. When investing outside of the RA you won’t find these constraints.
An ETF is an excellent option to invest in, with its low cost and lots of choices around. You can gain excellent diversity from investing in different ETFs. A long-term investment – investing for retirement would be regarded as long-term investing – should invest in growth assets, for example shares and property. A well-structured share portfolio historically has given the best return over the long term.
There will be short term volatility but if you can accept that and let the markets run through the ups and downs, you will be better off in a share portfolio.
Property is also regarded as a growth asset, perhaps a slightly shorter-term investment than a share, but the same principles apply in buying and holding for as long as you can.
Some ETFs to consider in this example would be the Satrix Top40, MSCI World, S&P 500, Satrix Property, Sygnia 4th Industrial Global Equity and Sygnia Global Property.
I would also consider other jurisdictions to invest in. Depending on the tax system you are in now, you may have the option of investing in the likes of the US, UK, Australia and so on.
An important component of investing is diversifying into other economies and currencies.
The world is a smaller place now with technology and we should be using that technology to our advantage. In these markets, you will have access to the same structures, like shares, property, bonds, cash and so on. Consider your investment strategy when deciding on which of these to invest in.
I would have a look at the tax system in the country where you are paying tax and consider their investment structures. You may be allowed to invest in some tax-free structures there. As always, consider how it fits into your full investment portfolio in terms of liquidity, fees, asset classes, term and risk.
Good luck on your investment journey!