Correcting the balance
REGULATION 28: IF BREACHED, WILL CONTRIBUTIONS BE TAX-DEDUCTIBLE? Responsibility for ensuring adherence to the Pensions Fund Act lies with the trustees of that fund.
AMoneyweb reader asked: On retirement annuities and Regulation 28: 1. If you breach the limits of Regulation 28, how long do you have to rectify the breach? 2. If you do not rectify the breach, what are the implications? Is it legal? Will your new or previous contributions no longer be tax-deductible?
3. If you are already over the limits of Regulation 28, should you rather leave that retirement annuity (RA) as is in perpetuity and just open a new RA, make new contributions to it and leave the old RA over the Regulation 28 limits without penalty?
(Regulation 28, issued under the Pension Fund Act, limits the extent to which retirement funds may invest in particular assets or asset classes. The main purpose is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios.)
Mauro Forlin answers:
If you breach the limits on Regulation 28, how long do you have to rectify the breach?
This depends on which product provider we are talking about and what the rules of that RA fund are.
However, what must be taken into consideration is that, should the trustees of the RA deem it necessary, they may change the allocation of your underlying portfolio allocation in your RA to ensure that it meets Regulation 28 limits.
If you do not rectify the breach, what are the implications? Is it legal? Will your new or previous contributions no longer be tax-deductible?
If you breach the Regulation 28 limit, then as explained above the trustees of the fund do have the power to amend your underlying fund allocations, to ensure that you comply. Again, how they enforce the necessary changes will be dependent on the specific provider.
As per the Pensions Fund Act, the responsibility for ensuring adherence to Regulation 28 ultimately lies with the trustees of that RA fund, the product providers within a specific mandate from the trustees.
Therefore, in my experience, the product providers would normally insist that a RA adheres to Regulation 28 and request that the RA be amended to ensure adherence to the regulation.
A breach in Regulation 28 will not affect the tax-deductibility of your contributions.
If you are already over the limits of Regulation 28, should you rather leave that RA as is in perpetuity and just open a new RA and make new contributions to the new RA and leave the old RA over the Regulation 28 limits without penalty?
Again, this will depend on the specific product provider and their fund’s trustees. Some product providers are happy to leave the annuity as is and ask the investor to start a new one that adheres to Regulation 28.
Some providers may demand you rebalance your portfolio immediately and others may allow you to adjust future contributions to gradually correct the breach.
So, if you, for example, have too high an allocation to SA equities, you could adjust your contributions so these are allocated to a money market fund, thereby increasing your allocation to cash-based investments and reducing the capital allocated to SA equities over time.
If one considers some of the older RA product lines at some life assurance companies, the view is generally that the overall RA fund must adhere to Regulation 28 and not each individual member.
The providers of the more modern linked investment service providers generally insist that each individual member should comply with Regulation 28.
Trustees have the power to amend your allocations