Fin24

Regulation 28 and my investments

2011-09-14 07:47

A Fin24 reader writes:

I am 35 and started late with my retirement savings. I started to invest in the Allan Gray retirement annuity (RA) with 100% equity.

As I am still young, I feel that I need to invest aggressively to play catch-up. But since Regulation 28 came into effect, this fund is now frozen.

I have about R7 000 per month to invest somewhere for the long term. I would like to know if I should maximise my RA tax benefit and invest as much as possible into an RA - given that I can only invest in a balanced fund now - or if I should invest only some of my tax-free benefit and also keep investing into aggressive equity funds, considering my age.

Christo Terblanche, Allan Gray's head of retail product development, responds:

As we are not authorised to provide financial advice, we cannot advise you on whether you should stick with a balanced fund within the RA and/or go aggressively into equities. We suggest you seek assistance from an independent financial adviser to help you achieve your long-term investment objectives

However, I can provide some clarification around Regulation 28.

All new RA, pension preservation fund or provident preservation fund accounts have to comply with the Regulation 28. However, you do not mention when you took out your RA investment.

If your account predates April 1 2011, you don't need to comply- provided you didn't transact after that date, and don't transact in the future. Your investments can stay as they are, even if they don't comply.

Nor you do have to change your existing debit orders into your RA account. But the minute you do, you will need to ensure your selection of funds - and your entire account - complies with the new regulation. 

This includes setting up a debit order if you didn't have one, or increasing or decreasing the amount of your existing debit order. 

The exception is an annual escalation; this can continue as is, without triggering the need to make your account compliant. Nor will you have to make your account compliant if you cancel an existing debit order.

But if you want to switch out of your existing underlying unit trust investments into your unit trusts, or make any additional contributions, you will have to make your account compliant. However, an existing phase-in arrangement, whereby you are phasing an investment into a fund over a period of time, isn't considered a transaction and so won't trigger the need to comply.  

If you transacted after April 1 and your account doesn't comply with Regulation 28, you will need to switch into a combination of unit trusts that is compliant. And if you transacted and have an existing debit order that too will need to change in order to comply with the regulation.

This must be done by December 31 2011.

 - Fin24 

Comments
  • Derrick - 2011-09-14 10:20

    What a rubbish answer. "I'm not allowed..." ag. Not even what the guy asked.

      Jules@theSea - 2011-10-05 11:22

      That's the problem with the whole industry I'm afraid - internationally too. If Warren Buffet started out now, he'd be closed before Christmas

      Jules@theSea - 2011-10-05 11:22

      That's the problem with the whole industry I'm afraid - internationally too. If Warren Buffet started out now, he'd be closed before Christmas

  • DirtySamurai - 2011-09-14 10:43

    Wish one could apply for exemption from this rule based on education level.

  • Young Investor - 2011-09-14 14:35

    I am 27 years old and have the same issue with Regulation 28. (I have the same 100% Equity RA with Allan Gray.) Now I only contribute the minimum amount to a balanced RA - the rest I invest in a normal Equity unit trust of my choosing. Although I won't get a tax deduction for unit trust contributions as I would've received for RA contributions, I would have had to pay tax on withdrawing money from the RA when I retire anyway... so I might as well invest in the Unit Trust of my choosing without interference. As I'm only 27, the extra growth in equities before I retire in almost 40 years time will compensate for any tax advantages I might lose. I would rather pay tax on a great investment than save a bit of tax on a slow-growing one for the next 40 years! The other benefits of a unit trust vs RA is that I can take my money at any time and invest it elsewhere for better returns, whether it is property, overseas, or whatever. I should warn however, that this approach needs a lot of self-discipline - when there are no regulations forcing you to wait until 55, or forcing you to reinvest 2 thirds in a living annuity, you must not go on a spending spree with the money before retirement! If you save for retirement in individual equities, unit trusts / properties (ie not in an RA), you will need will-power to think of it as 'retirement money' and not be tempted to use it for anything else but investing.

      rowan.raath - 2011-10-17 08:09

      Regulation 28 is a good thing! This article gives the completely wrong impression of the aim of the legislation. The comments from readers below also indicate that the average person should not be making their own investment decisions. There is a lot of science involved in the Balanced fund mandate and this has proven to give the investor a lot less volatility as well as consistent growth. Over the last 30 years the growth of the Balanced fund would be extremely similar to 100% equities, so why is everybody up in arms about it? The fact is there is a lack of investment education which is precisely why most people should always consult a professional. Also, due to the extreme volatility in equity markets, timing is crucial and most people tend to buy in the highs and sell in the lows. The average person cannot look past their emotions when making investment decisions. Diversification of your assets is the wise thing to do.

      rowan.raath - 2011-10-17 08:09

      Regulation 28 is a good thing! This article gives the completely wrong impression of the aim of the legislation. The comments from readers below also indicate that the average person should not be making their own investment decisions. There is a lot of science involved in the Balanced fund mandate and this has proven to give the investor a lot less volatility as well as consistent growth. Over the last 30 years the growth of the Balanced fund would be extremely similar to 100% equities, so why is everybody up in arms about it? The fact is there is a lack of investment education which is precisely why most people should always consult a professional. Also, due to the extreme volatility in equity markets, timing is crucial and most people tend to buy in the highs and sell in the lows. The average person cannot look past their emotions when making investment decisions. Diversification of your assets is the wise thing to do.

  • EGO7-2521 - 2011-09-15 08:29

    Have the compilers of Reg28 asked the investors and pensioners their view? This makes the admin of your living annuity more difficult for those who do not use an adviser. An adviser is a cost item, eg you withdraw R50k/pa/R1M and the adviser gets R5700-R11400 pa for keeping your LA compliant. I can do this myself, but other pensioners have to bear the cost of advice. A few pensioners that I know take the maximum withdrawal whilst growing their discretionary portfolio.

      Lee Van Rensburg - 2011-10-19 13:18

      hi ego7-2521, Those costs that you mentioned are not always the case and are also negotiable. One should generally find value in those costs. Please contact me on 0844 888 286. I would love to assist you.

      Lee Van Rensburg - 2011-10-19 13:18

      hi ego7-2521, Those costs that you mentioned are not always the case and are also negotiable. One should generally find value in those costs. Please contact me on 0844 888 286. I would love to assist you.

  • Jalarupa - 2011-09-22 06:46

    This legislation basically is punishing the more astute investor and financial advisor, as they now have to be more mindful of exceeding these equity limits, and rebalancing portfolio's on a quarterly basis -which let's face it, not many will be willing to do, due to the work and study involved, which is greatly sad IMO. Ask your broker about risk profiled REG28 managed funds to be on the safe side... Although most fund managers and manco's have already started to implement this change over to REG28, one should be mindful that if your current portfolio is not reg 28 compliant by 31 Dec 2011 the company will liquidate your excess exposure and place it into cash... Speak to your broker or financial advisor to get them to propose other avenues which could possibly bring about a yield the same as this lost equity. Placing a guarantee on your portfolio in an RA or preserver at inception will nullify the effects of Reg28 on that portfolio. I know with the Liberty Property Portfolio you can get a 100% fund allocation if you place a guarantee on the product and this will stay for as long as the guarantee is in place. http://www.liberty.co.za/fund-performance/Documents/exelsior/201107/excelsior-property.pdf

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