By Michael Rossouw, 10X Investments, Senior Investment Consultant
There is a widespread misconception among people using the living annuity products offered by South African investment houses, relating to how much of their portfolio they can hold offshore. More specifically, many believe they can hold no more than 45% of a portfolio offshore. In reality, if they use the right investment tool they can have a 100% offshore living annuity. If investors are to take advantage of a 100% living annuity, however, it must form part of a well-balanced portfolio, rather than being viewed as a single solution.
The confusion likely comes from the fact that the Pension Funds Act restricts certain funds to have a maximum of 45% of their assets invested offshore. So, once they get closer to that limit, they have to close off new investments into offshore assets. Those limits do not, however, mean that individuals can only hold up to 45% of their own portfolios 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. Should someone decide to go with a 100% offshore living annuity, however, they must be aware that it comes with risks too.
Understanding the limits
Before digging into what those risks and opportunities are, it’s worth taking a deeper look at where the confusion around offshore allocations comes from.
Much of the confusion comes from the fact that retirement funds are governed by Regulation 28 of the Pension Fund Act, which limits investment portfolios held in retirement funds to 45% offshore exposure. This limit doesn’t apply to living annuities, which are not regulated by the act and can invest up to 100% offshore.
There is, however, a caveat. Individual investors can only invest 100% offshore if the company holding their portfolio can. SARB prudential limits, which apply to financial institutions, limit financial institutions’ offshore exposure to 45% of retail assets. While some institutions are currently at their limit, there are a few (such as 10X Investments) that can offer clients up to 100% offshore.
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Opportunities and risks
Anyone wanting to use a 100% offshore living annuity must be sure that they understand both the risks and the opportunities available to anyone who uses it as a product.
The biggest opportunity is greater access to high-growth countries and companies that are world leaders in their industries, industries not available on the JSE (such as artificial intelligence). And, thanks to the obvious causes of South Africa’s poor economic growth – a weak rand, political missteps, and lack of investment in key infrastructure – this has resulted in higher returns achieved in offshore equities investments over the past decade.
As an indicator 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. By contrast, 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.
Another advantage to consider is the diversification benefit where one can diversify away from South Africa-specific risks, especially where the rest of non-retirement assets are based in in the country.
But there are also risks. Just because offshore equities have performed better than local ones over a sustained period, doesn’t mean they always will. Much of the S&P 500’s outsized returns over the past couple of decades were built on a foundation of tax breaks and cheap debt. The latter has disappeared as central banks around the globe have raised interest rates in a bid to curb inflation. Many of the tax breaks that US companies benefited from are also set to expire in the next couple of years, which could spark anxiety around developed market returns.
Two other risks to consider concern 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. 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.
Yay or nay
Ultimately then, South Africans must realise that 100% offshore living annuities are available and can be beneficial. The benefits of a 100% offshore living annuity can only really be achieved within the bounds of 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.
Disclaimer: At 10X Investments, we’re able to offer a 100% offshore living annuity because we’re underwritten by Guardrisk Life Limited, which has 99% of its assets held locally.
The above should not be considered financial advice in terms of FAIS. Individuals personalised financial advice to determine the suitability of a 100% offshore living annuity for their specific financial situation.