Prescribed Assets – Should you panic?

The press has recently been reporting that government seeks to introduce some form of prescribed asset regime for retirement funds.

While details regarding the nature and scope thereof are currently unknown, at the very least it would be reasonable to expect such regulations to impact investment returns adversely.

What we have been told so far is that government intends starting discussions with stakeholders around using the nation’s retirement savings pool to help it balance its books.

The question that arises is whether one should – in the light of the likely introduction of prescribed assets - make any changes to one’s current savings and investment strategy. Some pointers that can aid decision making include:

• Contributions to retirement funds still offer substantial tax benefits to investors. Furthermore, no taxes of any nature are levied on the growth of retirement fund assets: there is zero tax on interest, zero dividend withholding tax and zero capital gains tax. These are substantial benefits that have not changed at all.

• Diversification has always been an important investment strategy principle and in spite of the tax incentives mentioned above, one should guard against building one’s savings only in the retirement space. Building one’s capital base also inside the so-called voluntary savings space (anything but retirement funds) is critical - not only because voluntary savings help supplement income tax-efficiently, but precisely because it guards one’s savings against the kind of interference that we are witnessing at the moment.

• Currently there is simply not enough information available to justify making any substantial changes to existing retirement fund investment portfolios. While capital accumulated inside retirement funds may be left unchanged, one may want to re-consider the allocation of future flows to retirement funds. This should be decided on a case by case basis however after discussion with a financial planning professional.

• For investors past the age of 55, prescribed assets – if they are introduced – could be a non-event. This is so because of the arbitrage opportunity that exists between retirement funds (which are governed by the Pension Fund Act) and Living Annuities (governed by the Long Term Insurance Act). If prescribed assets were to be introduced, this would in all likelihood happen via changes to the Pension Fund Act (PFA). One could then simply retire from one’s retirement fund and purchase a Living Annuity (LA) which would not be subject to the prescribed assets regime in terms of the (amended) PFA. In fact, this is already the case: LA investors can invest their LA fund credits in any way they see fit. There is no need at all to adhere to the current PFA investment guidelines for retirement funds.

The downside to this strategy is that the additional income from the purchase of an LA would result in another tax. But this would effectively also be the result of any prescribed asset regime. At least one could at that stage determine the option that results in the more punitive tax and simply opt for the other.   

In summary: at present there is simply insufficient factual data available to warrant any radical changes to one’s existing retirement portfolio. If anything, the prescribed assets debate should be used to re-assess the relevance of one’s savings and investment strategy, in particular the split between building capital in the retirement as opposed to the voluntary savings space.