Warning for South Africans taking retirement savings offshore

There are many risks involved for South Africans whose living annuities rely solely on offshore investments to provide for their retirement.

10X Investments’ senior investment consultant, Michael Rossouw, said there is a widespread misconception among people using the living annuity products offered by South African investment houses about how much of their portfolio they can hold offshore. 

Retirement funds are governed by Regulation 28 of the Pension Fund Act, which limits investment portfolios held in retirement funds to 45% offshore exposure.

Notably, this limit doesn’t apply to living annuities, which are not regulated by the act and can invest up to 100% offshore.

Retirement and living annuities are options for retirees looking to convert their retirement savings into a steady income stream.

However, the difference is that retirement annuities offer guaranteed income for life with less control, while living annuities allow for investment growth and flexibility without a guaranteed income.

However, there is a caveat regarding living annuities’ offshore allocation limits – individual investors can only invest 100% offshore if the company holding their portfolio can. 

The South African Reserve Bank’s prudential limits apply to financial institutions and limit their offshore exposure to 45% of retail assets. 

While some institutions are currently at their limit, a few can offer clients up to 100% offshore.

“It’s an important distinction because many South Africans feel that their living annuities, which allow them to draw an income from their retirement savings while keeping their capital invested, could achieve more with greater offshore weighting,” Rossouw said.

However, anyone wanting to use a 100% offshore living annuity should ensure that they understand both the risks and the opportunities. 

The biggest opportunity is greater access to high-growth countries and companies that are world leaders in their industries, especially industries not available on the JSE. 

In addition, the obvious causes of South Africa’s poor economic growth – a weak rand, political missteps, and lack of investment in key infrastructure – have resulted in higher returns achieved in offshore equities investments over the past decade.

To give an example of how much bigger offshore returns are, R1,000 invested in the S&P 500 in January 2023 would have grown 29% nine months later. 

The same R1,000 invested in the JSE Top 40 over that period would have shrunk by 0.85%. 

“That’s not an anomaly either. Offshore equities have consistently outperformed local ones over the past decade or so,” Rossouw said.

Another advantage is the diversification benefit, which allows one to diversify away from South Africa-specific risks, especially since the rest of non-retirement assets are based in the country.

However, Rossouw said there are also risks for investors to consider. “Just because offshore equities have performed better than local ones over a sustained period doesn’t mean they always will,” he said. 

For example, much of the S&P 500’s outsized returns over the past few decades were based on tax breaks and cheap debt.

The latter has disappeared as central banks around the globe have raised interest rates to curb inflation, and many of the tax breaks that US companies benefited from are also set to expire in the next couple of years. 

Two other risks to consider are the matching of assets and liabilities and exchange rates. 

“Investors should consider if the majority of their living expenses are in rands or hard currency and invest appropriately,” Rossouw said. 

“Currency fluctuations can either offset the performance of underlying investments or add to the performance – positive or negative – and investors must be willing to stomach the bumpy ride.”

Ultimately, Rossouw said South Africans must realise that 100% offshore living annuities are available and can be beneficial. 

However, the benefits of a 100% offshore living annuity can only be achieved with a well-diversified, wider investment portfolio. 

“Even then, big global political and economic shifts can quickly change prevailing conditions, and anyone using a 100% living annuity must be prepared for that level of risk,” he said.