What is Regulation 28 in South Africa
Understanding legislation in relation to your investment portfolio is important. Avoid being influenced by fear, greed, or emotions when making decisions.
Despite the contentious nature of this law, it's crucial to comprehend Regulation 28 within the wider scope of one's total investment portfolio, without giving in to scare tactics, avarice, or emotional prejudices.
In this article, we answer the most frequently asked questions in relation to Regulation 28.
What is Regulation 28?
Regulation 28, a section of the Pension Funds Act, is intended to safeguard investors from inadequately diversified investment portfolios. It ensures that individuals nearing retirement invest their hard-earned savings wisely, without excessive exposure to high-risk assets.
Supporters of Regulation 28 argue that this law is successful in safeguarding pension fund capital from risky investments. However, some detractors argue that it's unjust to require long-term investors to reduce their potential profits. In other words, the latest modifications to Regulation 28 have resulted in the easing of some restrictions, thereby providing more adaptability for retirement fund investors.
What is an approved retirement fund?
Regulation 28 pertains to sanctioned retirement funds such as pension, provident, preservation, and retirement annuity funds. Essentially, it restricts how asset managers can distribute retirement savings across various asset classes, including stocks, real estate, and overseas assets.
To ensure understanding, it's important to mention that an approved retirement fund is a fund that has received approval from Sars under the provisions of the Income Tax Act, and for which a member fulfills the necessary eligibility criteria for entry into the fund.
What are the current limits?
Regulation 28 has been changed to allow approved funds to invest up to 45% in foreign assets. This includes all investments outside of South Africa. Now that retirement fund investors have the capacity to allocate up to 45% of their portfolio to foreign assets, asset managers can enhance portfolio diversification by exploring investment prospects in businesses, industries, and sectors that are not accessible in South Africa.
Additional restrictions encompass 75% in both domestic and international equities, 25% in real estate, 15% involvement in private equity, 10% in raw materials, 10% in hedge funds, and 2.5% in other non-included assets. Additionally, pension funds are not allowed to allocate more than 25% of their total assets in any single entity or corporation across all asset categories.
Despite these limits, however, retirement annuities continue to provide tax-efficient investment opportunities for investors. Individuals can save up to 27.5% of their taxable income or pay each year, with a maximum of R350 000. This helps reduce their tax bill by a lot.
Retirement annuities are not taxed on dividends, interest, or investment growth. At the end of the tax year, investors can include their RA contributions on their tax return forms and claim a deduction from Sars.
What about cryptocurrencies?
Regulation 28 now bans investing in cryptocurrencies because they are too risky and not regulated.
Retirement fund trustees must act in the best interests of the fund and its members. It is not recommended to invest retirement fund assets in cryptocurrencies.
What are the disadvantages of Regulation 28?
Despite the offshore cap being raised to 45%, the fact remains that 55% of your retirement fund capital is required to be invested in South African assets. Considering the declining number of companies listed on the JSE in recent years, this implies that investors have a restricted selection for investing in domestic companies.
However, it's important to remember that companies listed on the JSE earn more than half of their profits from abroad. This implies that those investing in retirement funds are indirectly gaining exposure to international economies through their domestic investments.
South African shares can be unpredictable due to currency changes, political issues, and economic problems. This unpredictability can cause concern for investors who have 55% of their assets in the country. This can make some investors worried about having 55% of their assets there. Investors can only allocate 45% of their portfolio to global industries, which often include technologies and innovations not found locally.
What is meant by the grandfather clause?
Before April 2011, asset management was conducted in line with Regulation 28 at the fund level. This implied that individual members of the retirement fund didn't have to adhere to Regulation 28, as long as the overall fund was in compliance.
From April 2011 onwards, all fresh retirement investments must comply with the stipulations of Regulation 28 at the individual level. However, individual members who invested before this date are not subject to this rule, as long as no transactional modifications are made to their portfolio.
Investments made before April 2011 maintain a so-called 'grandfathered' status and are not required to comply with Regulation 28. Nonetheless, if the member alters their debit order, contributes irregularly, or makes any changes in the portfolio, the 'grandfathered' status will be lost. Consequently, the individual will be required to ensure their investment complies with Regulation 28.
Should I keep my money in my retirement fund?
Many critics of Regulation 28 recommend that investors divest their pensions at the earliest convenience or pull out from their retirement funds immediately, with the aim of reallocating their capital into more diversified portfolios that have a higher level of foreign investment.
However, significant tax implications are linked with retirement or the extraction of money from a retirement fund. This should not be an impulsive response to the limitations of Regulation 28. Keep in mind that various other factors, such as investment fees and investor behavior, can negatively impact your investment.
Keep in mind, elevated charges don't always equate to increased returns, and it's illogical to jeopardize your returns by overpaying for investment management, administration, or advice.
In terms of investment habits, putting money into a retirement annuity is an excellent method to instill disciplined savings, since you're not allowed to tap into your capital until you turn 55. When investors are obligated to follow an investment strategy in a mandatory fund, they tend to adhere to the strategy for an extended period. This is a positive sign for the potential return on investments.
However, the flexibility of discretionary investment vehicles allows investors to try to time the markets, which can ultimately harm their investments. Discretionary investments offer diversification and liquidity in retirement but consider tax implications when choosing between them and compulsory retirement funds.
It's undeniable that South African investors have a broad selection of discretionary and mandatory funds to consider when constructing their portfolios. Moreover, integrating global diversification into one's portfolios has become increasingly straightforward.
Striking a balance between reducing tax, maximizing investment profits, securing future liquidity, and controlling risk can be challenging. Therefore, before making any hasty decisions about your retirement fund investments, we suggest consulting with a professional, unbiased advisor.
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