'Til death do us part … with your capital!

Reallocating your retirement savings may end up benefitting the taxman and not your retirement.

- Marc Lindley

Regulation 28 of the Pension Funds Act of 1956 – designed to protect retirement savings from imprudent exposure to riskier assets, including offshore assets – has frustrated some local investors of late. Local returns have lagged offshore returns, and some have argued that a discretionary investment fully offshore would be preferable to a retirement vehicle, limited as it is by regulation 28.

However, a previous article, penned by Ninety One deputy managing director Sangeeth Sewnath, discussed the impact of regulation 28 on portfolio returns and concluded otherwise. He argued that the tax benefits associated with a retirement fund potentially compensate an investor for any outperformance that might be enjoyed by increasing your offshore exposure beyond what is allowed by regulation 28, in a discretionary investment. He investigated a 30-year investment and drawdown cycle, consisting of a 15-year phase of contributions to a retirement annuity and then a 15-year spending phase, converting the consequent savings into a living annuity, so creating an income.

His calculations demonstrated that an unrestricted discretionary portfolio would need to outperform a regulation 28-compliant retirement fund portfolio by approximately 2.5 percentage points over the full 30-year period to leave an investor better off. Generating an extra 2.5 percentage points consistently over an extended period is exceedingly difficult to do.