New ETF regulations made easy – five key points explained

So, you’ve heard about the new regulations surrounding Exchange Traded Funds (ETFs) and what that means for retirement annuities, funds and the likes. Not quite sure what the fuss is about? Well, you’re not alone. I’ve done some digging around and listened to what the experts have been saying with a view to demystifying what is a murky financial topic but has important implications for hard-working savers, like you and me, who want to make the most of investments. In a nutshell, the changes made will now allow inward investments tracking foreign indices to be treated as a domestic, not international asset. This means that South Africans with retirement funds, retirement annuities and preservation funds can now increase their offshore investments past the previous 30% restriction. Read about the changes and what the benefits are, below. You can listen to an update from the experts, by hitting the listen button on the podcast box. – Jarryd Neves

By Jarryd Neves

This seems to be big news. What is it, exactly?

In the mid-term budget speech, Finance Minister Tito Mboweni announced that inward investment – such as ETFs (exchange traded funds) tracking a foreign index (something that measures a stock market) will now be treated as domestic – not international – assets. Various categories of investors can now treat those investments as domestic. This includes institutional investors (an entity which accumulates money to make investments and purchase assets). ‘So, that’s retirement funds, retirement annuities, preservation funds,’ said Sygnia CEO Magda Wierzycka in a note to investors.

Why is this important?

In terms of Regulation 28, South Africans are limited to investing internationally. This means that only 30% of your investments can be held offshore. The rest of the money? Well, that needs to be invested domestically. The announcement made by the Finance Minister will now allow retirement funds, retirement annuities and preservation funds to ‘increase their offshore allocation from 30% to whatever they wish it to be,’ according to Wierzycka, in an interview with BizNews founder Alec Hogg.

‘Theoretically, you can invest 100% of your retirement annuity offshore, provided that the extra 70% is invested by inward-listed instruments, like exchange traded funds,’ she said.

Alright. That’s interesting. But why should I be excited?

‘For the simple reason that the average investor – in pension funds, preservation funds, retirement annuity funds – has not made a real return over the last five years. In my opinion, I think it’s a major issue,’ said Magnus Heystek of Brenthurst Wealth Management, in an interview with BizNews founder Alec Hogg. Both Heystek and Wierzycka agree that this is a result of the limits on offshore investing and the ‘poor performance’ of the JSE.

‘If this goes through, it will give individual investors massive scope to increase their offshore exposure by any means they can – preservation fund, RA fund. It’s a great step forward,’ he remarked. 

But this just sounds like something that benefits the rich?

Well, no. It benefits most people. ‘You are suddenly allowing individuals to generate a lot more wealth than they would have created otherwise,’ says Wierzycka. She’s not referring to the elite 1% with already vast resources. ‘Anyone who is saving up until the age of 55 can accumulate much greater wealth. The bulk of those people are lower-income employees of large companies, whose only savings are their retirement fund – through the company provident or retirement fund,’ she said.

This, said Wierzycka, will enable the lower to middle income class of South Africa to ‘suddenly generate a much higher level of wealth, in terms of their savings.

‘You’re actually enriching the general population,’ she added.

Beneficial to the people – and South Africa

Now that people are allowed to build offshore wealth, the country may very well benefit. ‘They’ll be less inclined to start thinking of leaving the country – which is a tremendously expensive and emotional exercise – and secondly, they can remain in South Africa,’ says Heystek. He also adds that the quicker the ‘pension pots’ grow, the tax-paying potential from those incomes also grows.

Essentially, this means that you can now invest more than 30% of your investments offshore, without the emotional turmoil of emigration. ‘You can have the best of both worlds, if this is allowed to go through,’ said Heystek.

As a country, South Africa benefits too –  it gets to hang onto tax payers who would have financially emigrated. ‘We find that a lot of people are almost reluctant to leave the country, but they feel they need to do something. Now, the ability to have your money offshore does give you some protection against bad political policies. The politicians can mess up, but if I have my money in the S&P500 or Fourth Industrial Revolution I am less inclined to pack my bags, because I know my wealth is still rising,’ said Heystek.

*The dramatic changes opening up the world for your retirement funds (see above) are in focus in Jackie Cameron’s Finance Friday. Join her at noon on Friday with expert guests including Magnus Heystek. Register here: https://register.gotowebinar.com/register/6646694434270030861.