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Regulation 28 updates: are your retirement savings affected?

By August 29, 2022July 3rd, 2023FinGlobal

Regulation 28 updates: are your retirement savings affected?

August 29, 2022

Citizens saving for their own retirement is something that the South African government is very enthusiastic about, and for obvious reasons. If private individuals provide for their own income once they stop working, this reduces the burden of care on the state. As part of encouraging South Africans to save for retirement, government allows for significant tax benefits where an officially-recognised savings vehicle is used. In order to give investors more options, better flexibility and an incentive to continue using retirement products instead of cashing them in, the rules that govern these products have been updated. Let’s take a look at what the changes to Regulation 28 (which relate to the Pension Funds Act) mean for you and your retirement nest egg.

Retirement savings

Bringing flexibility and investment choice to retirement saving

Regulation 28 applies to all retirement investment vehicles, including pension, provident, preservation funds and retirement annuities and limits how these funds can invest. Thanks to amendments made to Regulation 28 there has been an increase in permissible offshore exposure from a maximum amount of 30% up to 45%. This limit increase should be welcomed. When applied correctly, this amendment can have a positive impact on your retirement savings.

Another significant limitation (which is not a new one) is that an investor’s overall shares/equity exposure cannot be more than 75%. This means that you could make an allocation of 25% to conservative assets like cash and bonds (most fund managers choose locally-based cash and bonds, which usually show better returns than offshore cash and bonds), and the remaining 75% can be placed in equity (also known as growth assets). Now, you can kick it up a notch with 45% offshore equity, as long as you use the remaining 30% for local equity. This means that investors now have more options for offshore markets, and they’re better equipped to take a more diverse approach to globalising their investment portfolios. Fund managers now have the choice of pushing a maximum limit of 45% or playing it safe and staying lower. This gives them more flexibility which can lead to higher returns given time.

“Balanced funds” will become even more attractive and effective

In South Africa, many multi-asset funds are balanced funds, all of which are Regulation 28 compliant in order to tap into the South African retirement savings pool. However, not all balanced funds are the same – simply by looking at their numbers for medium and long-term growth their differences are revealed. Look closer and you will see some focus more on local brand name stocks, while others focus on rand hedge stocks. Some prefer to dip in and out of markets and pivot quickly in response to changing dynamics, while others adopt a “buy and hold” strategy that must play out over time. Others have shown that they will not go above 30% offshore exposure, while others are choosing to increase their offshore exposure gradually.

Ultimately, all balanced funds differ significantly, and while fund managers might not agree on the amount of offshore allocation they are willing to take, certain funds will perform better than others because they use the different investing options and limits to their advantage. Just because offshore allocation can be increased, doesn’t mean that it should, but a fund manager that knows when and how to play this card will do so to the benefit of their investors.

Regulation 28 enhances global opportunities for local benefit

In lobbying for change, large institutional fund managers have successfully convinced the South African government that increasing the Regulation 28 offshore allowance is a smart move for the retirement investment industry, and for investment and overall financial stability. They warned that South African investors would be likely to stop using retirement structures entirely unless granted sufficient offshore market exposure and without a healthy savings pool in South Africa, our financial system would suffer massively.

For example, individuals invest in retirement annuities which go into unit trusts, which are used by fund managers for equities or bonds, which effectively gives companies and government money to operate and expand. Investors obviously want a return on their investments, but they also want the option to invest in opportunities offshore for enhanced returns and greater risk diversification. South African companies and the government are dependent on investors to give them a financing mechanism, and fund managers also need this savings pool to conduct their core business.

It’s a one-hand-washes-the-other type of ecosystem, but unless there is a consistent influx of new money, the ecosystem will stagnate. In allowing for more offshore diversity, government has made a move that will benefit everyone. Instead of taking the opposite action and insisting on increasing local investment, our government has given investors more options and more reason to keep investing in retirement products. The long-term outcome of greater choice in investment opportunities will put more money into consumers’ pockets which can only lead to an increase in spend on goods and services – everything that keeps the economy flowing as it should.

Long story short: these Regulation 28 updates are a breath of fresh air

SARS affords South Africans significant incentives to make use of pension funds and retirement annuities to save for their golden years, especially where individuals fall in a high marginal tax bracket. By saving part of your gross income (up to 27.5% capped at R350 000 per annum) you will get a tax deduction for the amount you save, which is a guaranteed indirect return of being taxed in such a high marginal bracket. Where the  Regulation 28 limit used to be an off putting factor for many investors, with the new limit of 45%, retirement investment vehicles suddenly look a lot more attractive. Saving for retirement should be a core focus for individuals when formulating and implementing their investment strategies, and this updated offshore investment limit now allows investors more freedom to think long term.

FinGlobal: retirement annuity encashment specialists

While these legislative updates are to be applauded, some South African expats might wish to take their retirement savings out of South Africa and gain 100% offshore exposure, given that they’ve relocated abroad permanently. If you’re one of these expats and you want to withdraw your South African retirement annuity, FinGlobal can help.

Leave us your contact details and we’ll be in touch to discuss how you can move your money out of South Africa quickly and cost-effectively.

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