South African retirement fund guidelines are changing – how will this affect you?

This article was originally published on The South African

South African retirement savings are governed by the Pensions Fund Act. Within this act, Regulation 28 lays out the maximum percentage of a fund that can be invested in different asset classes. For example, only 30% is permitted to be invested offshore. This aims to force diversification and prevent savers from keeping all their eggs in one asset basket.

What are the proposed regulation 28 changes?

The changes mean to make it easier for funds to invest in infrastructure and provide a way for the government to measure such investment. Infrastructure will be recognised as a classification within the current asset classes, and funds will be able to invest 45% domestically and 10% in the rest of Africa. That's a high percentage compared to other limits like offshore investment (30%) and property (25%).

According to the government, “The proposed review to Regulation 28 is informed by a number of calls for increased investment in infrastructure given the current low economic growth climate.”

The changes could be good for South Africa and are in line with the government's commitment to boost infrastructure in this year's Budget. Infrastructure investment can provide long-term, stable returns, which appeals to fund managers. However, investors would be justified in being a bit nervous considering South Africa's track record with mismanagement and corruption of such projects. Furthermore, the investment vehicles created to channel funds into these projects could become targets for further corruption.

The other possible issue with infrastructure investment is the liability mismatch issue. Infrastructure investments usually have to be built before they generate a return. Therefore, they can have a long lead time between investment and providing a yield to investors. For those whose RAs and pensions are close to maturity, they may not see the benefits of such investment before they need to exit their funds.

As infrastructure is not an asset class, individuals will seldom have control over how much of their savings get invested into it. If you're in a group scheme, the trustees govern the portfolio options and relevant asset allocations. Even in cases where you can select your asset allocation (for example when setting up an Retirement Annuity), infrastructure investment is spread across asset classes and the specific allocation will be up to the underlying fund manager.

When you should consider a (global) living annuity

If you're over the age of 55, you have the option of retiring your RA, pension, provident or preservation fund into a living annuity, which is not bound by the Pension Funds Act, but by the Insurance Act. This gives you the option to keep growing your investment on your own terms and escape the restrictions of Regulation 28 entirely.

The living annuity will pay you a regular income from your investment and whatever remains of your capital after your death can be passed to heirs.

Important considerations about living annuities:

• Once in a living annuity, you won't be able to withdraw funds in the form of capital. The amount you can withdraw would be in the form of an income, that is restricted by an income draw rate band between 2.5% and 17.5% p.a. of the living annuity's fund value.
• If earning other income, receiving an income from a LA could shift you into a new income tax bracket.

Infrastructure investment aside, the primary benefit of not being bound by Regulation 28 is that you can increase your global exposure. The South African equity market is only 1% of the global economy, but under Regulation 28, only 30% of your retirement savings can be invested elsewhere.

We offer a global living annuity solution where funds are invested into a portfolio designed by our UK wealth advisors, using a global fund universe and matched to your risk profile, that pays out income to a South African bank account in Rands.

to find out more about our global annuity solution, or for other cross-border financial planning advice, you can email wealth@sableinternational.com or give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519.