By Iona Minton, My Money Editor.

With the myriad investment vehicles available to the investor it is often difficult to make a choice. A popular savings vehicle is a Retirement Annuity. Although most people have heard of RAs few really understand what they are. Here are the most commonly asked questions

1. How does a RA differ from a Provident Plan or a Pension?
The main difference is that RAs are paid for by individuals who are either self-employed or who work for a company that has no retirement scheme. In other words, they are individual tax deferred savings plans.

2. Can you rely solely on a RA for your retirement?
Two factors control whether or not you can do this: If you have less than 30 years to retirement then you should look at saving more than 15% of your salary and, if your RA is not producing good results then you need to switch to an investment that gives you a better chance of beating inflation.

3. Is a RA an interest-based product or growth product? Most RAs will have a mixture of investments within the account. The majority of your money should be invested for growth (ie. 60% in JSE shares) but portions of it will be placed for interest (ie. 20% in bonds and 5% in cash) and rental income (ie. 15% in property trusts).

4. Can you lose all of your money if you invest in an RA?

The chance of you losing all your money in an RA is extremely remote. This is because you will be investing in vehicles that are very large. For instance, if your RA is one of the unit trust-linked variety your monthly investments will be going into professionally managed funds with hundreds of millions of rands under management.

5. What are the different types of RAs?

Assurance Company Retirement Annuities
A retirement annuity is vital for anyone working for a company that does not have a pension or provident plan. Unfortunately, traditional assurance company RAs carry too much commission and admin fees and part of the premium is often diverted to purchasing life cover. The premium is tax-deferred, reducing your monthly tax burden during your highest earning years. You can save 15% of your pre-tax income and modern RAs will give you various investment choices.

Investment Term Rate of Return Total 5 Year % Return
R200 pm 60 months 11% R15,487.41 29.1%

Unit Trust Linked Retirement Annuities
These have all the tax deferment benefits described above plus the significant advantages of much lower costs, transparency and control. With these you can invest you money in any of the over-two-hundred unit trusts, track your investments weekly and switch between funds when the times are right. You may have to shop around to find a company that will take A R200 per month investment some companies will only accept a minimum of R500.

Investment Term Rate of Return Total 5 Year % Return
R200 pm 60 months 11% R15,909.62 32.5%

The drawback here may be that you pick a very poor selection of unit trusts then pay no attention to their performance.

So, if you’re self-employed or work for a company that has no group pension, RAs should play a role in your investment. At the moment it is the only tax deferred investment vehicle available to a person earning a salary.