Sable International creates solution for expats with living annuities in SA
Living annuity gives unique access to offshore investments
Due to increased demand, the billions of rand invested in living annuities by South Africans abroad can now be matched with their circumstances to alleviate currency and economic risk associated with SA.
Traditionally, living annuities have been invested in a similar way to retirement annuities, with only 30% of the portfolio exposed internationally. Annuity providers were loathe to extend their discretionary asset-swap capacity to such investors in general and allow them further or total offshore exposure.
According to Niel Pretorius, wealth adviser at Sable International, this creates a problem for those living abroad as their retirement funds are directly linked to the value of the rand and SA’s economic prosperity.
“Surprisingly, we found no products available in SA that met our requirements of being able to invest 100% offshore, have extensive investment choice and be cost effective. This is largely because the large providers have limitations on their asset-swap capabilities and generally use this capacity for corporate clients and high net-worth individuals,” says Pretorius.
“Under Regulation 28, only 30% of a retirement annuity can be invested offshore. A living annuity is not subject to Regulation 28, yet most are largely invested in line with it, which means only a third of the living annuity market of R330bn would be invested offshore.
As many of its clients have retired abroad or are approaching retirement, Sable, along with the annuity providers and investment managers MitonOptimal and Momentum, created a way for them to invest completely offshore, with global investment diversification.
“If you live in sterling, you want to benefit from your investments in sterling. It makes total sense for your investments to be in your domestic currency rather than in rand and with little or no offshore exposure,” adds Pretorius.
In SA, once a retirement annuity or pension fund is transferred into a living annuity, it can’t leave the country as a lump sum. There is no way to transfer a living annuity abroad other than when it has been reduced to a prescribed amount (usually R50,000). Clients who have already left SA and who are living in a different currency zone and economic environment typically want to avoid a previously saved pension pot remaining in SA.
In countries such as the UK and Australia, the Organisation for Economic Co-operation and Development’s double-tax treaties usually allow the tax to fall on the individual wherever they are residing, and pay tax on their pension where they live.
Expats can obtain a tax directive from the South African Revenue Service to indicate to the living-annuity provider that they are non-residents and therefore can receive the gross amount and allow the tax to be calculated in the country where they are resident.
Alternatively, they can suffer the tax in SA and claim a tax credit in their country of residence. It is important to note the provisions of the specific treaty, as there are a number of exceptions to the general rule.
Looking at demographics, this option suits former South African residents who have either retired from their retirement funds or are looking to retire from such funds, and who have upwards of R1m saved in these funds.
Although the product is wholly invested in an offshore set of funds, in order to draw income it must be paid in SA to a South African bank account and then remitted abroad to the annuitant. The exposure to the rand is thus limited to the time of receipt and remittance, which can take place within a day.
Foreign-exchange control regulations remain in scope should the government ever decide to introduce stricter capital controls, but there is no getting around that once you are in a living annuity. If you have a retirement annuity, you could decide to withdraw the funds in full upon formal emigration, but typically the tax implications to do so at retirement age would be punitive and would need to be carefully considered.
This article was paid for by Sable International.