By: Ronald King, Head: Public Policy & Regulatory Affairs, PSG Konsult
If there is one thing (ex) President Trump is right about, it’s the fact that there is an incredible amount of fake news out there. Fake news has been rampant especially during this lockdown period, the longer lockdowns (in various forms continue), the more intense fake news is likely to become. However, it is not only false information that is dangerous. The most damage is caused when information is used out of context and inflated to promote a specific agenda. In the world of investment this easily leads people to make wrong decisions.
The biggest target for these attacks is retirement annuities. Most of these attacks are along the lines of “Government is going to grab your pension money!” What makes this so easy to believe is that we don’t have confidence in our government anymore and we know they need a lot of money to fill the big gaps they have created. Fortunately, the reality is still quite different.
The biggest onslaught on retirement funds is that Government will seize your money through so-called prescribed assets. According to reports out there, Government is going to withdraw your money from your pension fund, channelling it to Eskom and SAA, simply leaving you in a weaker financial position. However, this is not how prescribed assets work. As the name suggests, your fund is to be invested according to prescribed guidelines. So, it remains your money, but you are obliged to use it in a specific way, like lending it to Eskom or SAA. And this is one of the risks. When lending money to a business that is basically bankrupt, there is a risk of losing your money. At the same time, loans to these institutions carry good interest rates and that is why most investment managers, and not only retirement funds, already invest a portion of your money in them.
If there are not enough investors who are willing to lend money to these institutions, then Government has to do it. To get the funds they will need to hike taxes, which may cause more damage than prescribed assets would. However, given all of the factors, we are not big advocates of prescribed assets, as history has shown that they do more harm than good for the economy.
Last year, Business South Africa estimated as part of its proposal to government that over R4 trillion is needed for the post-pandemic economy. The inflows to retirement funds available for prescribed assets constitute but a tenth of that. Prescribed assets is therefore not the simple solution either, as so many may think. Currently, Government is engaging industry to consider ways for retirement funds to invest in infrastructure. Due to the structure of retirement funds as well as infrastructure investments, to date it has virtually been impossible for retirement funds to invest in the latter. As a result, solutions are currently developed to facilitate investing in infrastructure investments, creating new opportunities and benefits without any obligations.
Prudential regulations and offshore investments
Regulation 28 sets the prudential limits a retirement fund may invest in specific assets. Although it differs from prescribed assets that says what you must invest in each asset, it still has an impact on your retirement fund.
All of us need to invest a portion of our money offshore. The exact amount will depend on your personal circumstances as well as the market. As the current rules for prescribed assets dictate that retirement funds may not invest more than 30% offshore, some people say this is destroying your investment. However, they forget two important aspects. Firstly, you get as much as 45% of your investment in retirement funds back, which you may then invest offshore. A R1 000 investment in a retirement fund will enable you to invest R300 of that amount offshore. Using the R450 tax benefit to supplement your offshore investment means you spent R1 000, with R750 placed offshore. In addition, you have R700 in South Africa, which only has to outperform R250 offshore.
Even though you will eventually pay tax on your pension, it will be considerably less than the tax you are saving now. A direct offshore investment is not tax free either, and the capital gains, dividend and interest tax before retirement may be quite high.
Retirement funds and emigration
The latest scare story is that Government wants to seize your retirement funds when you emigrate. This is based on a new rule from 1 March 2021 providing that you may only access your retirement funds after a period of three years of not being tax resident in South Africa anymore. However, the reason for this rule is that Government wants to get rid of all the official emigration rules, so you don’t have to go through an expensive and a difficult application process anymore. Now access is granted automatically once you have been out of the country for three years, making for a much better and easier process.
Watch out for fake news:
- Query everything – don’t accept something is correct just because it suits your current view of the world.
- Check the source – make sure it is reliable, and be aware that any social media posts are virtually impossible to validate.
- Ask yourself if there may be any ulterior motives for the sender. An emigration company may want to force you to make use of their services.
- Contact your financial adviser. Most advisers will be able to determine its authenticity and truthfulness.