If you’re an older investor who’s approaching retirement age, you might be concerned about funding your lifestyle and healthcare through what could be a long post-retirement stage of life. If you’ve planned for your retirement carefully, the assets you have available when you retire could include a pension or provident fund, a retirement annuity, a tax-free investment (TFI), or a combination of the 3. You’ll want to invest these funds in something that keeps pace with or exceeds inflation.

Investment property and unit trusts are the most common and reliable vehicles to invest in at retirement. However, the lump sum you’ve built up by the time you retire may not be enough for you to invest in both. What do you need to know to make an informed choice about which will be the better retirement investment vehicle for you?

Unit trust investment

A unit trust is a collective investment vehicle in which investors pool their funds, managed by a professional fund manager. The pooled funds are invested in a diverse portfolio of assets like stocks and bonds. Unit trusts have a number of pros and cons: 

Advantages

• Diversification: Unit trusts can offer you much greater diversification than you could achieve by investing directly, without needing you to manage the investment actively. Diversification is one of the most important components in achieving optimal long-term investment growth. If you’re investing your money in a suitable unit trust fund, you’ll be getting instant diversification. From as little as R250 per month, you can get exposure to the property, equity, and global markets in a single unit trust.
  
  
• Easy access to shares: Investing through a unit trust enables you to access shares that you may not have been able to buy directly because of the high price per share or the complexity of buying global shares on a foreign stock exchange. It also saves you the hassle of trying to reinvest the dividends paid by shares.

• Liquidity: A unit trust gives you options. You can invest a regular amount via a monthly debit order or make ad hoc contributions whenever you can afford to. It’s as easy to withdraw your money from a unit trust account as it is to contribute. You can either set a regular withdrawal monthly or make ad hoc withdrawals with a turnaround time of a few days. You can have the entire amount released into your bank account, or just part of it.

Disadvantages

• Tax: If you buy a unit trust in your retirement fund, a TFI account or a living annuity, your returns will be tax-free. However, if you buy unit trusts directly, you’ll pay tax on the returns.
  
  You’ll pay tax on any interest earned and paid to you from the unit trust investment, if your investment earns more than the annual interest exemption. This threshold is currently set at R23,800 for those younger than 65. If your unit trust earnings cross this threshold, the amount exceeding the threshold must be included as part of your taxable income on your tax return.
  
  Your dividends are also subject to tax of 20% (for local shares and individual investors). Finally, you must also pay capital gains tax on the capital profit made on your investment, if and when you sell it. However, the first R40,000 of capital gains each year are exempt from tax.

Property investment

When you retire, you could use your retirement savings to buy a second property, zoned for residential, industrial or commercial use, as an investment to rent out. This will secure you a solid fixed asset and regular rental income in your retirement portfolio. However, renting has its own pros and cons.

Advantages

• Tax: You will only pay tax on the net rental income for the year, so you can deduct rental-related expenses from your gross rental income. These include levies and rates and the interest portion of your bond instalments, if you have a property loan.
  
  
• Leverage: Property has tangible value as a physical asset, so a home loan to invest in a buy-to-let property can finance your wealth-creation strategy.

Disadvantages

• Less liquidity: Disinvesting from a unit trust fund takes only a few days, but selling property to convert it into cash can be quite a lengthy and costly process. The quality of life in both commercial and residential areas can go through many changes over time, so the value of property can fluctuate. You don’t want to be in a position where you’re faced with unforeseen expenses but have all your wealth tied up in property.

• Tax: Tax can be a disadvantage for property owners as much as it can be an advantage. Capital gains tax can take a significant chunk out of any profit you make when you sell a property, especially if you’ve owned it for a long time in an area where property prices have appreciated dramatically. Unfortunately, capital gains are not adjusted for inflation, so you pay tax on the inflationary growth too. Also, as mentioned above, any income earned from the property is taxed at your marginal rate of tax, as opposed to capital gains tax, which is usually taxed at a lower rate.
  
  
• Hidden costs: These are expenses that buyers often forget to include as part of the total costs of buying and running a rental property. They include conveyancing attorney fees, transfer costs on the purchase, bond costs and ongoing property maintenance costs, especially for older buildings. If you own property in a share scheme, you could also be liable for a special levy raised against your property for any repair or maintenance costs.
  
  You may also go through periods when the building isn’t fully occupied by tenants, when you will be responsible for the bond repayments and other costs out of your own pocket. You’ll also need to trust your tenants to take good care of the property. If they don’t, or they stop paying rent, or you need to evict them from the property for any other reason, you could also face expensive legal costs while your investment isn’t providing any income.
  
  
• Lack of diversification: Unless you have a significant amount of money to invest in a diverse spread of properties by property type and region, it is very difficult to diversify your property investments.

In the end, your choice of the better option to invest in at retirement will boil down to your long-term perspective. Unit trusts are managed on your behalf, are easier to administer, and offer liquidity. If you’re more hands-on, and you study the property market and buy property at a discount price in a good area, it can pay off well over the long term in rental and resale value.

Nedbank offers free advice about how much you will need to save for a comfortable retirement at your various life stages. You can also link to our savings and investment options and find out which is right for you. Be careful to do extensive research if you’re interested in a buy-to-rent property investment.

Speak to a financial adviser about your retirement savings and investment planning.