Which funds to use in retirement funds and tax-free investments

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” This powerful statement, frequently attributed to Albert Einstein, rings true in so many ways. A simple cashflow forecast will quickly highlight the value of remaining invested over the long term. For advisers, helping clients make additional contributions when possible, and structuring these investments in a cost- and tax-efficient manner, can significantly enhance their ability to achieve long-term financial goals.

The latest national budget confirmed an increase in annual tax-deductible contributions to retirement funds from a maximum of R350 000 to R430 000, as well as an increase in the yearly limits for tax-free savings accounts from R36 000 to R46 000. This is encouraging for disciplined savers, and it presents advisers with an important opportunity to improve clients’ portfolio efficiency.

Both retirement funds and tax-free savings accounts provide the advantage of tax-free growth on income and capital gains within the structure – a level of flexibility and freedom that can meaningfully impact long-term outcomes. As long-term vehicles, they complement each other well in retirement planning.

However, the challenge remains: South African investors face a landscape of over 1 800 unit trust funds and more than 290 exchange-traded products, including Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), Actively Managed Certificates (AMCs) and Actively Managed Exchange-Traded Funds (AMETFs). With so many options, many clients feel overwhelmed. This is where advisers’ guidance becomes invaluable.

Diversification remains one of the most powerful tools at your disposal – the closest thing to a guilt-free lunch in investing. Building portfolios diversified across asset classes and investment styles helps clients navigate uncertain global markets more confidently. But selecting multiple funds does not automatically create diversification. Advisers must pay careful attention to correlations between funds; highly correlated funds tend to move in the same direction, which can be particularly damaging during market drawdowns.

Staying the course and helping clients stick to their long-term plan is equally critical. The temptation to chase top-performing funds is strong but rotating into yesterday’s winners is a reliable way to erode long-term returns. Transparent, market-related fee structures also matter and should be part of every suitability discussion.

The phase of life a client is in will influence which underlying investments are appropriate. Advisers play a crucial role in assessing a client’s existing assets, income needs and growth expectations. For clients in the wealth-creation phase with a long investment horizon, a more aggressive stance, including overweight exposure to local and offshore equities, is generally appropriate. The same applies when investing surplus funds earmarked for long-term growth.

A common mistake is derisking too aggressively as retirement approaches. If clients are drawing income throughout retirement, they still require meaningful exposure to growth assets like equities to outpace inflation over the long term. Income-generating assets such as bonds and lower-volatility alternatives like hedge funds can also play a key role in smoothing returns and supporting sustainable withdrawals.

Tax considerations add another layer. Clients in higher marginal tax brackets may benefit from holding income-generating assets within retirement funds or TFSA structures, while allocating growth assets, which face lower tax rates, to discretionary portfolios or alternative vehicles.

Ultimately, fund selection does not need to be overly complicated. Simplicity often serves clients best. Advisers who provide objective, structured, and well-researched guidance can help clients avoid costly mistakes and stay aligned with their long-term goals.

Visit Momentum Securities for more information.

Disclaimer: This article does not constitute financial advice. Please consult one of our qualified portfolio managers before investing in any product. Momentum Securities (Pty) Limited is an authorised financial and credit provider. Registration number: 1974/000041/07 | A member of the JSE Ltd | FSB license number 29547 NCR CP 2518.