Period as a semi-retired pensioner: 323 days
I am one of those boring old farts who started accumulating assets with the goal of ultimately becoming financially independent during my twenties. Although one always worries about what amount is enough, I no longer have to be a corporate drone.
Recently some younger professional South African people just embarking on their careers have asked me for my financial planning advice. This week’s blog has a strong South African focus so my international readers can skip this submission if this does not interest you.
Of course, the best advice is to start your own business and to become a billionaire. Unfortunately, that’s not for everyone. Alternatively, marry into a very wealthy family. My advice is for the rest of you who must tread a more conventional path.
I was in my twenties during the eighties and there was some simple advice regarding what you should do. First, you should maximise your pension contributions as well as your employer contributions. Second, you should get onto the property ladder and take out a mortgage for this purpose. Property was an appreciating asset, and you need somewhere to live. Third, you should seek to reduce your debt as fast as possible with a view to becoming debt-free. Finally, you should open a brokerage account on the Johannesburg Stock Exchange (JSE) and start investing in a portfolio of equities. As I went down this path, we had many boozy debates about whether you should have no debt or rather gamble on your JSE account outperforming the interest on your mortgage. Provided you had some risk tolerance and patience and fortitude to ride out crashes and corrections the gamble was worth it. This worked well for our generation the baby boomers.
If we fast forward to 2022 how much of this advice is applicable today. Perhaps almost none of it. Let’s go through these assertions one by one.
Let’s start with pensions. As a pensioner, I have ample time to ruminate about pensions. I know it’s sad but it’s true. Maximising your contributions to your pension fund is a good idea, right? Not so fast. One of the core value propositions of contributing to a pension fund is that you can invest pre-tax money in your pension fund, and you only pay tax when you retire and start drawing your pension. You will still need to pay tax later but potentially at a lower rate and not at your marginal rate. So far so good. The pension fund sector in South Africa is heavily regulated and the government is extremely prescriptive about where your money needs to be invested and has rigid asset allocation rules. 70% of your pension assets need to be invested in South African assets and the offshore allocation is limited to 30%. You can effectively increase the offshore allocation somewhat by the fund buying shares whose South African business footprint is small such as BHP Billiton. However, a significant allocation to South African assets is required by law.
Once you commit money into a South African pension in your twenties the law is structured to encourage you to leave the money there until you are at least 55. So, you are making a 30-year commitment to South Africa. This then brings up the question as to how good an investment proposition South Africa is. Let’s have some politically incorrect ruminations regarding that.
Over the last 10 years, South Africa has been a very poor investment. One of the most important root causes of South Africa’s poor investment performance is the ANC government which is best described as a corrupt disorganised crime syndicate that pays lip service to fighting corruption. The evidence that the ANC is corrupt is overwhelming and any number of references can be provided but the Zondo commission reports are good enough and comprehensive enough. To paraphrase the Goldman Sachs, quote the ANC is a great vampire squid wrapped around the face of South African society relentlessly jamming its blood funnel into anything that smells like money. Pension assets are a giant pot of money. The Public Investment Corporation (PIC) houses the pension assets of the entire public service reporting to the minister of finance. South Africa has had several disgraced and corrupt finance ministers. Corruption has been in progress at the PIC for quite some time and there is ample evidence of this. I reference a current scandal where PIC money has been squandered and South Africa’s disgraced former minister of health appears to be implicated. https://www.dailymaverick.co.za/article/2022-02-15-r1-8bn-unemployment-insurance-fund-monies-lost-in-pics-zweli-mkhize-linked-bounty-brands-bet/. Zweli Mkhizi is not so disgraced that he is not a member of the national executive committee of the ANC. Another is the Ayo scandal. https://www.news24.com/fin24/economy/pic-looks-on-while-surve-inc-burns-through-state-pensioners-billions-20210127. Some of the pension assets of South Africa’s police, teachers, and nurses are being squandered by the corrupt. How will this evolve? Nobody has been criminally charged and the beneficiaries are enjoying their spoils.
Not satisfied with the PIC the corrupt are eyeing private pension assets and the notion of prescribed asset investments into (state-owned?) infrastructure is being proposed. A thin and unconvincing veneer of patriotism, social justice, and job creation is used to extol the virtues of this. The opportunity for corruption is obvious and you would have to be extremely naïve not to expect this. If these were good investments, then you would not need the heavy hand of the government to force pension funds to invest.
There has been a global trend driving down asset management fees, but South Africa is a small market, and the big financial institutions charge generous (undeserved) asset management fees which eat into your returns. As far as you can you need to reduce these fees.
It is also an unfortunate feature and curious artifact of the South African pension funds act (PFA) that should you die before you retire then the trustees of the pension fund will decide how to allocate your pension assets to the people, they decide are most dependant on you. It does not matter who you nominate or what your will says. https://www.news.uct.ac.za/article/-2021-08-26-pension-law-deprives-most-south-africans-right-to-decide-on-inheritance. You need to understand that even though it is your money you are not in control of how it is allocated. This generates many disputes which are costly and cause lengthy delays. You need to understand that your money will not necessarily go where you want it to.
So could it perhaps be that it would be better for a young South African to bypass the entire South African pension industry and move post-tax money offshore away from the ever-changing restrictions of the pension funds act and the reach of the vampire squid? Better returns in an offshore environment could compensate for the tax advantages of a pension. If you are compelled to invest in a South African pension, perhaps you should seek to minimise your contribution and understand your South African pension may perform poorly and the rules may change. The trend is to more regulation, not less.
So how about owning your house? In most of South Africa, Johannesburg included, property is not a good investment. Every five years the City of Johannesburg (COJ) updates the municipal valuation role to determine your rates and taxes. This is currently in progress. In Saxonwold the suburb where I live there are many properties on the market and where sales are happening many are below the municipal valuation from five years ago. Several of my friends and colleagues who are moving out of Johannesburg are really struggling to sell their houses. There are many reasons for this but municipal collapse with an associated collapse of infrastructure is one of the contributing factors. https://ruminantpinkfriday.com/2022/01/14/ruminations-of-a-grumpy-unfashionable-older-south-african/. The ANC lost the municipal election in October 2021 and the city is now led by an unstable coalition of 8 parties. The ANC is in the background playing a destructive role as a sore loser having partially lost their ability to distribute patronage and corruption in Johannesburg. Don’t bank on a rapid turnaround in Johannesburg. You need somewhere to live but it’s not an investment.
So, should you open a JSE account? Over the last 10 years or so South Africa has been a terrible place to invest your money. https://www.biznews.com/sa-investing/2022/01/07/magnus-heystek-south-africa. During this period the JSE has returned about 3% per annum while the S&P 500 has been growing at 16% over the same time. My advice is to rather open an offshore account and ignore the JSE.
The advice to become debt-free is still good advice. South African interest rates can be volatile and an important milestone on the road to becoming financially independent is to become debt-free. If you want to live a bit more dangerously you can have a moderate amount of debt and try to earn higher returns than the interest you pay on the debt. This is not something I have done but then I’m a boring old fart.
Am I perhaps being over-dramatic? Maybe. Can this change? Of course, it can but it requires South Africans to unite and stand up against corruption. Will this happen? I don’t know but I hope so. Right now, it pays to be corrupt. Until we see significant numbers of corrupt government officials being convicted and going to jail including the former president and implicated cabinet ministers South Africa is not a good place to invest your money. Apart from patriotism why take the risk? I would not recommend trading a goal of financial independence for patriotism. In any event, I would argue that tolerating and funding corruption even tacitly is not patriotic. In the meantime, move your money offshore. You can always bring it back if things change.
Thank you very much for your comments and suggestions and please keep them coming.
Regards
Bruce
Ruminant Pink Friday 
I was not aware of section 37C – well done, a new fact discovered – even for another old fart who thought he knew almost all about his money.
One change I suggest to your advice – to build a cash float of at least 3, but preferably 6 months of expenses of ready money, so when things go pear shaped, you can make the right decision, rather than one forced upon you by needing immediate living money. That optionality is well worth its opportunity cost, especially in todays more volatile and uncertain times.
As for the JSE vs offshore, it does depend on timing, and would suggest the issue is more taking advantage of the one free lunch offered by the markets, being that of diversification across uncorrelated asset classes. Sectors of the JSE have delivered well, but I agree generally at greater risk and cost for poorer returns than offshore.
I’d also add that debt free is an excellent target, but the way is by living within your means. Earn more or spend less , your choice. Be willing though to invest in yourself, so you can earn more. It may well be easier than spending less.
Great subject – and worthy of sharing insights.
LikeLike
Agree Mark Spot On.
LikeLike