Hello reader,
You’ve raised a very pertinent question, and it’s one that investors are indeed justified in scrutinising. It’s crucial to recognise that the concept of prescribed assets is not novel in South Africa. In fact, it was extensively applied during the apartheid era.
Recent developments came to light during the ANC’s unveiling of its 2024 general election manifesto on Saturday, 24 February. The ANC announced its intention to “engage and direct financial institutions” to channel their investments into public infrastructure projects through prescribed assets.
Read:
ANC to pursue prescribed assets plan after vote
ANC pledges to transform financial sector in election manifesto
While the full implications of prescribed assets are yet to be determined, it is anticipated that should the ANC implement such measures, they would likely affect pre-retirement investment vehicles, including retirement annuities, pensions, and preservation funds.
Given this scenario, investors might consider exploring alternative discretionary investment options that would remain unaffected by this legislation. Below are some alternatives highlighted for consideration.
- Tax-free savings account (TFSA): TFSAs offer an avenue for investors to contribute up to R36 000 annually, with the benefit of not being taxed on any investment returns. These accounts are accessible to investors across various age groups and income levels. For instance, a parent or guardian can open a TFSA for a minor, allowing for tax-free accumulation and withdrawal of funds. It is crucial to note the lifetime limit of R500 000 on contributions, meaning if one maximises the annual contribution, it will take approximately 13.8 years to reach this cap.
- Direct unit trusts: Serving as a straightforward investment option, direct unit trusts grant investors access to a wide range of investment choices. This vehicle is open to individuals of any age and tax bracket, requiring parents or guardians to handle all documentation until the minor reaches 18. Unlike TFSAs, direct unit trusts incur taxes on investment returns, including capital gains, interest, and dividends tax, calculated according to the investor’s personal tax bracket. With no upper limit on contributions, direct unit trusts present an attractive option for those who have fully contributed to their TFSAs.
- Endowments: Characterised by higher minimum investment requirements, endowments are taxed differently compared to TFSAs and unit trusts. Taxation within endowments is conducted at a flat rate of 30% for income, and capital gains are taxed at 12%. For investors in higher tax brackets, this may offer a tax-efficient investment route. A notable advantage of endowments is the ability to designate beneficiaries, thereby avoiding executor fees on transferring funds to beneficiaries after the investor’s death. It’s crucial to understand that endowments come with access limitations, usually incorporating a five-year lock-in period during which withdrawals are restricted. However, loans against the endowment may be available.
Local or offshore?
In response to your inquiry about choosing between local and international investment avenues, it’s essential to recognise that the performance returns of any investment vehicle will ultimately be determined by the specific assets it contains. Since the investment options discussed are discretionary, they offer the flexibility to allocate funds across local and international markets.
Diversifying your portfolio by investing outside South Africa is a strategic and advisable approach.
With that in mind, here’s a comparison of the returns, in South African rand (ZAR), from the South African market (FTSE/JSE) against those from the US market (Nasdaq and S&P 500), the European market (Euro Stoxx 50), and the UK market (FTSE 100) as at 29 February 2024:
Source: Author supplied
Naturally, we advise that you evaluate your investment risk and seek guidance from a wealth advisor before making any decisions.
Lastly, it is important to highlight that the concepts of prescribed assets, the creation of a sovereign wealth fund, and increased state participation in monetary policy have been recurring elements in various ANC manifestos, yet these proposals have not been put into action.
Listen to this RSG Geldsake podcast (in English) where Ryk van Niekerk chats with the ANC’s Zuko Godlimpi about prescribed assets and why the pensions industry ‘won’t wake up one day to be told of an arbitrary amendment to Regulation 28’ (or read the transcript here):
You can also listen to this podcast on iono.fm here.