For many South Africans, retirement funds represent their most significant long-term investment. Because these savings are intended to support individuals decades into the future, lawmakers have long recognised the need for guardrails to prevent excessive risk-taking, with the primary one being Regulation 28 of the Pension Funds Act (PFA), which governs how retirement funds may invest their members’ money. While the regulation is often debated – and sometimes criticised – it remains a central pillar of South Africa’s retirement system. For investors and financial planners alike, understanding its purpose and implications is essential when building a sustainable retirement strategy.

What Regulation 28 is designed to do

Setting limits on how pension, provident and retirement annuity funds may allocate their assets across various investment classes, Regulation 28’s overarching objective is to ensure that retirement portfolios are sufficiently diversified and not exposed to excessive risk. Without such rules, retirement savings could theoretically be invested in highly concentrated portfolios or speculative assets that may jeopardise long-term security. Regulation 28 therefore aims to balance the pursuit of investment returns with prudent risk management by limiting how much exposure retirement funds may have to specific asset classes such as equities, property, offshore investments and alternative assets.

Current asset allocation limits

The regulation has evolved over time, with the most recent amendments coming into effect in 2022, when government increased offshore allowances and introduced a specific allocation for infrastructure investment. The key limits currently include:

• Equities: Maximum of 75% of the portfolio
• Property: Maximum of 25%
• Offshore assets: Maximum of 45% in total
• Hedge funds: Maximum of 10%
• Private equity: Maximum of 15%

Importantly, these limits apply at a portfolio level, meaning asset managers retain flexibility within those parameters to construct diversified portfolios across sectors, geographies and asset classes.

Why diversification matters in retirement investing

At its core, Regulation 28 is built on the principle that diversification reduces risk. Retirement investing is fundamentally different from speculative trading because it is about steadily building wealth over several decades while protecting capital from catastrophic loss. As such, diversified portfolios are designed to reduce the likelihood that poor performance in a single asset class will significantly damage retirement outcomes. From a financial planning perspective, the regulation also encourages a disciplined investment approach that focuses on long-term asset allocation rather than short-term speculation.

The tax advantages of retirement funds

While the investment restrictions of Regulation 28 sometimes attract criticism, it is important to view them alongside the significant tax benefits that retirement funds provide. Remember, contributions to retirement funds are tax deductible up to 27.5% of the greater of remuneration or taxable income, subject to an annual cap of R430 000 (increased from R350 000 effective March 2026). This effectively allows investors to redirect money that would otherwise have gone to SARS into their retirement savings. In addition, investments held within retirement funds benefit from a highly favourable tax environment in that there is no tax payable on interest income and dividends, and no CGT payable on investment growth – and over long investment horizons, this tax-free compounding can materially enhance retirement outcomes. For many investors, these tax advantages more than offset the constraints imposed by Regulation 28.

The criticisms of Regulation 28

Despite its protective intent, Regulation 28 is not without its critics. The most common argument is that the regulation limits investment freedom, particularly for younger investors who may have longer time horizons and greater tolerance for volatility. Historically, critics have also raised concerns that limiting offshore exposure could leave South African investors overly reliant on the domestic economy. Given the relatively small size of the Johannesburg Stock Exchange compared to global markets, some argue that retirement portfolios should have even greater access to international opportunities. Another concern raised by critics is that some investors interpret the regulation as a signal to withdraw or retire from retirement funds early in order to move capital into discretionary investments with fewer restrictions. However, we believe that this approach should be treated with caution.

Why early withdrawals can be costly

Leaving a retirement fund prematurely can result in significant financial consequences. When investors resign from employment and withdraw their retirement savings, the amount withdrawn is taxed according to the retirement withdrawal tax tables, which are generally less favourable than the tax treatment applied at retirement. As a result, a meaningful portion of the capital intended for retirement can be lost to tax long before it has had the opportunity to compound.

Beyond the tax implications, early access to retirement savings can also undermine one of the key behavioural advantages of retirement funds: discipline. Because retirement annuities generally cannot be accessed before age 55, they encourage investors to maintain a long-term savings habit and avoid reacting impulsively to short-term market movements.

By contrast, discretionary investments offer greater flexibility but can sometimes expose investors to behavioural pitfalls. When funds are easily accessible, investors may be more tempted to respond emotionally to market volatility — often buying during periods of optimism and selling during downturns, which can ultimately damage long-term investment outcomes.

The point is that, from a financial planning perspective, investor behaviour and investment costs often have a greater influence on long-term returns than the asset allocation limits imposed by Regulation 28. High fees, frequent portfolio changes, and poorly timed investment decisions can erode returns far more significantly than the diversification constraints within retirement funds.

Balancing retirement and discretionary investments

In practice, many financial planners adopt a balanced approach by combining Regulation 28-compliant retirement investments with discretionary portfolios. On the one hand, retirement funds benefit from tax efficiency and enforced long-term discipline, whereas discretionary investments provide additional flexibility and the ability to increase global exposure where appropriate. By using both structures strategically, investors can build portfolios that benefit from the strengths of each investment vehicle. This approach also aligns well with broader financial planning principles, where retirement funding forms part of a diversified personal balance sheet that may include discretionary investments, property, business interests and other assets.

Ultimately, Regulation 28 should not be viewed in isolation but as part of a much broader retirement planning framework that takes into account tax efficiency, liquidity needs, investment risk, longevity and estate planning. Rather than seeing the regulation purely as a limitation, investors may benefit from viewing it as a framework designed to protect one of their most important financial assets – their retirement savings.

Have a wonderful day.

Sue