Prescribed assets – Caveat emptor

*This content is brought to you by Brenthurst Wealth.By Brian Butchart *.With the upcoming elections grabbing so many of today's headlines, it's easy to lose sight of another threat to your wealth and retirement savings in South Africa. A potential amendment to prescribed assets in the pension fund rules has been swirling around for several years, and although not yet enacted upon, that doesn't mean it's off the table.And if it isn't off the table, then I suggest you sit up and take notice. At the heart of the matter is your retirement is under real threat if forced to increase allocation to state-owned entities and infrastructure..In the same way that we don't invest in unsustainable businesses, we are advising clients to consider the potential impact government prescription may expose their retirement funding to and the potential impact on their retirement savings and outcomes..An imminent decision?.The ANC touched on prescribed assets in its 2019 election manifesto with references to the introduction of prescribed assets within regulation 28 funds managed by financial institutions for social and economic development within a regulatory framework for socially productive investments. Although not yet implemented, The ANC 2024 Manifesto is once again pushing for prescribed assets in South Africa – where it mentions transforming the financial sector by using prescribed assets to support employment and industrialisation..Don't get me wrong: we desperately need investment into our economy and into infrastructure and institutions. However, government's past performance doesn't inspire confidence after one hallowed institution after the other – from Transnet, Eskom and SAA to the Post Office ..Despite the highest levels of budget deficit and state debt, the ANC also aims to leverage a sovereign wealth fund, among other things. .If pushed ahead, Regulation 28 will be altered, forcing asset managers with Regulation 28-compliant mandates across retirement assets to buy a certain amount of government institutional bonds. .The fact that this will be at higher yields, could soften the blow, and most South African pension funds currently have some exposure to government bonds anyway. .But constant bailouts of these government-run institutions, state capture revelations and continued corruption and ineffective management of state resources have created much uncertainty, even concern in the market, especially around prescribed asset requirements that could force all fund managers to invest in government-approved instruments, regardless of the underlying economic circumstances of the underlying entities. .So the concern is understandable.Who is affected?.These changes would impact anyone invested in pension or provident funds, or in a retirement annuity or any type of Regulation 28-compliant fund, including preservation funds..If you're over the age of 55 and no longer working, you have the option to retire from any pension products and opt for a living annuity. If you're still working and contributing to a company pension fund, you'll only be allowed to cash out your retirement benefits at retirement or resignation assuming you are 55 or older. Private pension funds like retirement annuities and/or preservation funds can be converted immediately once over the age of 55..If you qualify, switching to a living annuity provides greater flexibility in how your retirement savings are invested as living annuities aren't governed by Regulation 28 of the Pension Fund Act. That means the prescribed assets rule does not apply to living annuities, and you have full flexibility of your asset allocation, including up to 100% offshore. Regulation 28 currently restricts offshore allocation to a maximum of 45%..These limitations also impacted performance of regulation 28 funds, with offshore investments over the past decade yielding far better results than the JSE ALSI .If you're under 55, unfortunately you cannot retire from any of your retirement products, but suggest discussing a strategy with your financial advisor to maximise your offshore allocation and divert where possible investment to other discretionary investment opportunities outside the traditional retirement fund instruments, taking any personal tax benefits and considerations into account..So, what now?.If you're able to divest from funds impacted by Regulation 28, then I suggest considering this. This decision is not without consequences, so please speak to or find a qualified financial advisor to provide sound financial advice appropriate for your personal circumstances..For instance, if you're over 55 but still working and investing into a retirement annuity, you could consider retirement from the RA, taking the tax free lump sum of up to R550,000 for investment elsewhere (offshore) and the balance to a living annuity, drawing the minimum income of 2.5% and re-investing the income into a new RA. Retire from the new RA annually and adjust the contribution to a new RA using the income from your living annuity every year until retirement. Obviously personal tax implications would need to be considered. However, this needs to be weighed up against the long-term impact on your pension from potentially underperforming prescribed assets and/or restricted offshore allocation. .Unfortunately, your options are more limited if you're employed and contributing to a company pension fund. The best way to reduce your risk if you're in this position would be to minimise your company pension fund contributions and maximise your discretionary investments..We obviously cannot predict the future, but as wealth advisors tasked with assisting clients to improving their financial outcomes, we have to consider all risks. This may not be an immediate risk or require immediate action, but it certainly requires awareness..As it stands now, the plan for prescribed assets have been proposed – but not yet formalised. It will, however, only be regulation and not an Act of Parliament so it could be realised sooner than later. .The advisory and asset management industries, as well as various lobby-groups, are voicing their opinions on the proposals, intentions and potential impact of prescription to oppose any such moves. .My advice: Consider the potential implications and review your current retirement planning. Be proactive and seek advice from a financial advisor in order to discuss how best to protect your retirement benefits. .* Brian Butchart, CFP®, is the Managing Director for Brenthurst Wealth brianb@brenthurstwealth.co.za.+27 (0) 10 035 1391 .Read also:Offshore restrictions are hurting living annuitiesFive important steps for successful retirement planningIf Mick Jagger can do it so can you

Prescribed assets – Caveat emptor

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