Retirement annuity or discretionary investment.

For the last couple of years we have been hearing about prescribed assets again. This is where the government controls where you can invest your money. This control can only apply to retirement funds like retirement annuities, pension funds, preservation funds and provident funds.

The government cannot control where you invest your discretionary funds yet. They can control how much money you can invest offshore via the exchange control regulations but they give you a lot of room to maneuvre by allowing you to take up to R10 million offshore per year, but only for discretionary investments. On pension instruments you are limited to 30% offshore exposure and a maximum of 75% in equities.

It is not difficult to understand that government’s having a say about where you can invest your money is bad news. If they run out of money as is the situation now, they can very simply force you to invest your pension money into the hole they want to fill, like SAA or Eskom. They can stop the 30% offshore allocation or even limit the allocation to equities. We have to understand, of course, that we have been living with prescribed assets for a very long time. In the 1980s these restrictions were even worse than today. It is also not all bad to invest in something like a retirement annuity because of the great tax benefits you receive, but there is a balance you have to maintain.

At JWR, a discussion about the choice between these two types of investments would have gone something like this: Retirement annuity contributions will give you a great tax benefit while you are earning an income, but you are limited as regards the choice of investment. It will also be partially taxed one day when you retire (at the earliest age 55) unless you buy a living annuity or life annuity with at least two-thirds of the value at that date. Legislation may also change in future, which will have an impact on the plans you are making today. On the other hand, if you forgo the tax benefits, you can invest you money anywhere in the world and the government has no say in your decisions. We believe that you should consider a balance between these two investments. By putting some money into a retirement annuity, you lower your taxes and have a built-in savings discipline because you cannot access the money before age 55. On the discretionary investment, you can save for a specific objective like buying a car, and you can invest in some of the leading international companies not listed in South Africa.

It seems like the time has come where government and pension funds are talking about changing the prescribed asset rules again to fund our failing economy. There is a vast amount of savings in pension funds and it is a very cheap way for government to finance their shortfall. Once again a diversified investment approach would have served you well if things should  change.

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