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Much Ado About Regulation 28 and the Private Investor

Posted On: Friday, September 2, 2022

Much Ado About Regulation 28 and the Private Investor

What is Regulation 28

The management of retirement funds is highly regulated – as it should be. After all, these are your life savings we’re talking about! The key piece of legislation governing how retirement funds can be invested is called Regulation 28 of the Pension Funds Act. It limits the amounts that can be invested in the various asset classes to minimise risk.

Change for good

Over the last few years, the government has been slowly raising the limit on how much investors in pension funds (including RAs) can hold offshore. In this year’s budget, the offshore allocation was raised from 30% to 45%.

While some great companies are listed on the JSE, they are only a fraction of what is available globally. Our local market is about 0.5% of the world’s capitalisation by value. This means that investors previously had to keep 70% of their retirement assets at home were missing out on opportunities elsewhere.

Are balanced funds the solution to RAs?

Over the past decade, Regulation 28 has led to a surge in popularity of so-called “balanced funds”, but recent research shows that some of the major balanced funds in SA have displayed low returns because of their high management and ‘performance fees. So, if you’re a private investor, do contact a professional to assist you in determining the underlying asset allocation in your RA.

Are RAs the solution to retirement investing for private investors?

There’s been a lot of discussion in the media of late about whether investors with a long-term time horizon should invest in RAs or invest directly offshore for greater geographical exposure and potentially higher returns. 

The upside of RAs is that the contributions are tax deductible. This lowers your effective income tax rate and frees up cash to invest elsewhere. You can invest up to 27.5% of your income into an RA, with a limit of R350,000 per year. Returns are further supersized by the fact that no dividends tax is payable or income tax on the growth within an RA.

But if you invest directly offshore, the world can be your oyster. For investors with a long-term time horizon, the most obvious alternative to an RA is to invest directly offshore using your discretionary foreign exchange allowance of R1 million per year.

Investing offshore for your retirement allows you to diversify by spreading your risk across the global economy. It also empowers you to benefit from a broader universe of industries, companies, geographical regions, currencies and investment ideas. But, again, we emphasise that private investors should contact a professional financial planner to select the recommended offshore funds for retirement.

Beware if you plan to emigrate

As a private investor, you need to know that it can be difficult to get your money out of a local retirement vehicle such as an RA. Last year the government passed a law stipulating that anyone who leaves the country must wait three years before withdrawing their retirement savings. This may put significant pressure on your cashflow while settling into a new country.

What does the future hold?

There is no doubt that the most recent amendments to Regulation 28 are positive as they allow for greater offshore exposure and alternative asset classes. But there’ve also been rumours that prescribed government assets will be incorporated into Regulation 28 – quite startling considering the performance of Eskom and other SOEs. Retirement funds (including RAs) should be encouraged to invest in good businesses. Well-managed SOEs that offer accountability and transparency will inevitably attract investment – not because fund managers are forced to do so, but because they’re actually good investments. Those SOEs will succeed, and the others will disappear.

That’s the perfect-world scenario. The truth is that nobody knows which way the coin will land next time Regulation 28 comes up for discussion. The key right now is not to panic. There’s no imminent threat of prescribed assets being implemented, so don’t make hasty decisions based on rumours.

A lot to digest? Put your mind at ease and consult with your financial advisor to create an agile retirement plan that can quickly adapt to any future legislative changes – good or bad.

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