In general, questions from clients follow very specific themes. These themes are usually fuelled by friends and family discussing the latest investment fad (Bitcoin has been strangely quiet recently) or the latest bug bear from media, who are trying to sell web clicks, newspapers or products. The concept of prescribed assets is the latest point of order around the braaivleis fires and is being used by more than a few media outlets to sell clicks.
What are Prescribed Assets? This is basically where Government forces you to invest your money into a specific type of investment or project. This is usually in the form of Government Bonds or Government Infrastructure projects. In South Africa we already have a form of Prescribed Assets in Regulation 28, this regulation governs the percentage allocations in retirement funds and lays down certain maximums and investment parameters. An example of this is that only 30% of a Retirement Funds Assets are allowed to be invested offshore (ex Africa).
The first thing that we need to know about the prescribed asset debate, is that it is a theoretical one. No one knows for certain if prescribed assets are going to be implemented and if they are going to be implemented, how they will be implemented. The debate started in 2017 at the ANC’s elective conference but the idea is not a new one, we did have prescribed assets in the 1980’s. The major problem around the current debate is that it creates uncertainty. Markets and investors do not do well with uncertainty. Uncertainty often leads to irrational decisions being made.
One of the recommendations often made in the media, is to “Retire” from your retirement annuity as soon as you can at the age of 55. The primary reason for this recommendation is that Living Annuities are not subject to Regulation 28 and will therefore (theoretically!) not be subject to prescribed assets. The problem with this recommendation, is that you have to pay tax on the lump sum withdrawn in excess of your tax-free amount. You also need to draw an income from your living annuity. This extra income is then added to your current income and taxed at your marginal tax rate. This whole rationale doesn’t really make sense from an investment perspective.
I have also seen and heard of people resigning from their employment just to access their retirement funds, using pending prescribed assets as the excuse.
Whilst many of the Life Companies already have established infrastructure/ ESG funds that are doing quite well, the real problem that we have in South Africa is not a lack of money to invest in these projects, it is a lack of projects with reasonable returns, good social outcomes that are properly managed with no smoke screens and corruption.
So, my recommendation is that until we have some form of certainty as to whether prescribed assets are going to be introduced, and if they are going to be introduced how this will happen, please don’t have any knee jerk reactions by retiring out of funds before you need to, or by stopping your contributions to you retirement planning just because prescribed assets in whatever form may happen.
CFP® CA (SA)