RAs and tax (#234)

The Fat Wallet Show from Just One Lap

For all the flack they’ve been getting, there’s no easier way to reduce your tax liability than pension fund contributions. In this week’s episode of The Fat Wallet Show, we help Megan correct an assumption about her tax savings on retirement annuity contributions. We use the opportunity to talk about offshore allocation and prescribed assets.

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Win of the week: Megan

I listened to your "To RA or Not" episode today, and one of the questions (about RA contributions vs paying off a bond) reminded me of a dilemma I've been wondering about for a while.

I'm 25 and working as a junior engineer. My marginal tax rate is at 26%. I'm currently putting R3000/month into my TFSA (Satrix MSCI World ETF with Easy Equities) and R2000/month into a Sygnia RA with decent fees. I save R1000/month in a TymeBank goalsaver for holidays. After that I can't really afford more savings at the moment, which means I'm not adding anything to my long-term discretionary investments. (I have an emergency fund and enough short-term investments for my needs and goals.)

My question is this:

Considering

1) The Regulation 28 requirement on the RA which limits global diversification,

2) My low tax bracket, and

3) The fact that Rand devalues around 4% per year to the dollar,

is the RA really worth it?

Putting money into an RA saves me 26% now. But what if I were, instead, to put that R2000 into a discretionary investment (e.g. MSCI World ETF)? If the MSCI World outperforms the local 70% of my RA by 4% a year (which seems likely imo), then surely the discretionary fund would be "outperforming" the RA in the long term?

For arguments' sake, with the assumption that global returns outperform Rand returns by 4%, then after 10 years, R2000 in the RA + 26% (assuming I could magically reinvest the tax return instantly) would be worth

(2520 x 0.3 x 1.04^10) + (2520 x 0.7) = R2883.

While R2000 in the discretionary global ETF would be worth:

(2000 x 1.04^10) = R2960.

(I mean this in relative terms, I don't really expect 0%).

This difference would only get greater over time due to compounding.

The other thing is that the RA money will all get taxed in future. And that the RA fees, although low, are higher than the discretionary fees.

So while I fully understand the tax benefits of an RA for people earning at 45%, I'm not as convinced for those of us in some of the lower brackets. What do you think? Is my assumption wrong about global markets showing better returns? Is it normal to feel this uncertain about putting so many eggs in the SA basket, or am I being silly? Is an RA worth it for me now, and if not, when does it become worth it?