There is a widespread misconception among people using the living annuity products offered by SA investment houses over how much of their portfolio they can hold offshore.
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 though, it must form part of a well-balanced portfolio rather than being viewed as a single solution.
The confusion probably comes from the fact that the Pension Funds Act restricts certain funds to have a maximum of 45% of their assets invested offshore. Once they get close to that limit they thus have to close off new investments into offshore assets.
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
Those limits do not mean individuals can only hold up to 45% of their own portfolios offshore. It’s an important distinction because many South Africans feel 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 though, they must be aware that it comes with risks too.
Before digging into the risks and opportunities, it’s worth looking at the source of the confusion about offshore allocations.
Much of the confusion comes from retirement funds being 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 a caveat. Individual investors can only invest 100% offshore if the company holding their portfolio can. The Reserve Bank’s prudential limits, which apply to financial institutions, limit financial institutions’ offshore exposure to 45% of retail assets. While some institutions are now at their limit, there are a few (such as 10X Investments) that can offer clients up to 100% offshore.
Artificial intelligence
All investors wanting to use a 100% offshore living annuity must be sure that they understand the risks and opportunities affecting anyone who uses it.
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.
Growth
And, thanks to the obvious causes of SA’s poor economic growth — a weak rand, political missteps, and lack of investment in key infrastructure — it has caused 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 0.85%. That’s not an anomaly either. Offshore equities have consistently outperformed local ones over about the past decade.
Another advantage is the diversification benefit in which one can diversify away from SA-specific risks, especially if the rest of nonretirement assets are based 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 it always will. Much of the S&P 500’s outsize returns over the past few decades were built on a foundation of tax breaks and cheap debt.
The latter has disappeared as central banks globally 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 few years, which could spark anxiety over developed market returns.
Other risks concern the matching of assets and liabilities and exchange rates. Investors should consider if most of their living expenses are in rand 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.
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 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.
Rossouw is senior investment consultant at 10X Investments.
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