If you are thinking about taking out a retirement annuity (RA) or altering an existing RA policy after April 1, your underlying investment choices will have to comply with a new requirement in terms of regulation 28 of the Pension Funds Act by July 1, the date by which all affected retirement funds must comply with the new requirement.
Regulation 28 lays down guidelines about investments in different categories of assets to ensure that your retirement savings are invested responsibly.
The new requirement, which applies to RAs, preservation funds and umbrella funds where you can choose the underlying investments, is that regulation 28 will apply at both retirement fund and fund member level.
Until now, the investment limits have been set at fund level, leaving individual members out of kilter with the requirements of regulation 28. As a result, some fund members have been able to “cherry pick” assets to the disadvantage of others. For example, they have invested fully offshore, closing out offshore investments to other members. This situation negated the main objective of regulation 28, because it allowed individual members to channel more investments into high-risk options than the regulation allowed at fund level.
Katherine Gibson, the director of financial markets and competitiveness at National Treasury, says that to avoid the confusion and costs of existing RA policies (and contracts) having to be restructured, a “grandfathering” provision has been included, which means that RAs issued before April 1 will be exempt, as long as the substantive terms of your contract do not change.
For example, you cannot increase the size of your contributions, beyond what is reasonable for inflation, and you cannot invest additional lump sums without the existing policy becoming subject to the revised regulation.
If you do, the allocations to the asset classes and sub-classes that make up the underlying investments in your RA may have to be reduced or increased to bring them into line with the new regulation 28 requirement.
Examples of the investment limits in terms of regulation 28 are: no more than 75 percent of your total savings in each tax-incentivised retirement fund may be invested in equities, no more than 25 percent of your total savings may be invested in property and no more than 25 percent of your total savings may be invested overseas.
Domestic asset allocation prudential unit trust funds are designed to meet the requirements of regulation 28.