Make the right call, don't follow the stampeding herd offshore
Predicting the future is an inexact science, but we can plot a possible course of action
The outlook for SA seems so bleak that many of us are considering big decisions about our future, namely, should I stay or leave? Is our country on the brink of collapse? Will we rise again? Predicting the future is an inexact science, but we can plot a possible course of action.
Do not get the call wrong!
Some people have already cashed in and left, and others are also losing faith in the government and the country but, although there is a real sense of fear in the air, they have no intention of leaving. Maybe this is because they don't have the money or they realise that despite everything, SA is an awesome place to be. It certainly beats living in a flat over the greengrocer in Swindon.
If you're agonising over your future, consider these few rules of the game:
Rule 1: Fear sells
Fuelled by fear, increasingly more people either say that they don't want to contribute to retirement annuities (RAs) this year, or they want to cash in their preservation funds and take what they can offshore. The state capture fallout, Eskom, prescribed assets and the possibility of a credit ratings downgrade are among the reasons for the money flight to safety. But let's slow this down and crunch the numbers.
Rule 2: The power of compound interest
Consider for example, if you are a top-earner paying tax at the marginal rate of 41% and you can invest the maximum (R350,000 a year) in an RA.
If you invest but don't use an RA, you lock in the 41% tax loss.
The after-tax savings will be subject to interest, dividend and capital gains taxes, while the pre-tax money in your retirement fund is not subject to any tax. It is also exempt from estate duty and your retirement fund can't be attached by creditors. Compound the difference over time and if you're planning on staying in SA, you'll be a whole lot better off if you stick with the retirement fund.
The second scenario is to withdraw as much as possible out of your retirement funds and take the proceeds offshore. An extreme example is a full withdrawal of R5m from your preservation provident fund. This withdrawal will be taxed according to the withdrawal tax tables.
If you withdraw the R5m, the South African Revenue Service (Sars) will take R1,647,000, rapidly reducing your R5m to R3,353,000 — a 33% loss to take your retirement money offshore.
Now, here is the point. Assuming you are invested in a run-of-the mill balanced unit trust, you are already directly invested offshore at the maximum 30% limit. You could assume that, conservatively, your fund manager is also 20% invested in large rand-hedge stocks that do not count towards the 30% offshore limit (Prosus, Richemont, all commodities stocks, BAT etcetera).
If this is true, 50% of your retirement fund could already be offshore. The other half would be exposed to SA, and yes, potentially some prescribed assets such as government bonds, but retirement funds are already invested in them, especially given current good yields.
Rule 3: Learn from history
If you achieve your goal of getting all your money offshore, what could go wrong?
Rewind to 2001, when former president Thabo Mbeki thought that some players in the ANC were plotting against him, causing a run on the rand to R13.53/$. The brightest business minds bonded their big houses to the hilt and took the money offshore.
Rule 4: Never sell at the bottom
From that point they bought into offshore equity, primarily US equity (S&P index: 1,140). But then, in December 2002, the rand strengthened to R8.58/$, the offshore equity cycle turned and dollar prices collapsed (S&P index: 899).
It took about nine years for the S&P to recover its losses. The rand further strengthened to R5.68/$ in December 2004 (a -42% loss in currency and a stock market loss in dollars of -4%). To add insult to injury, interest rates on home loans were 15% at the time.
The questions to ask in February 2020 are: are global equity prices currently quite high? Are global bond markets overpriced? Is the dollar very strong?
Most commentators believe all of these to be so. So, is history about to repeat itself?
Rule 5: You never know what's going to happen
We're not saying that you must stay in SA, nor that you should invest all your assets in SA. What we are saying is that you must be sure that you are doing the right thing for you and your family.
Cashing in your retirement savings, like trying to time the stock market, is a recipe for disaster, and is a mistake from which you may never recover.
A certified financial planner will be able to help you calculate how much capital you need in your retirement funds to afford your lifestyle, ensuring that you are able to meet your liabilities in SA, for which you will need some rand-based investments. In the early 2000s, before the markets took off in 2003, people who hurriedly took their money offshore suffered the triple whammy of inflation, weak offshore markets and a strong rand on their lifestyles in SA.
Once you know you have enough assets in SA to afford your lifestyle, you can build up any surplus savings in offshore assets slowly over time, preferably directly offshore. But, unless you're an expert, don't try to choose your own funds.
Although it's a terrible idea, I don't think prescribed assets would lose as much as you will if you cash out or don't contribute to your RA.
After watching President Cyril Ramaphosa's state of the nation address, it may feel like a time for big decisions, but you may just need to adjust your tactics, knowing full well that you don't know what is about to happen.
O'Mahony is the founder of Veritas Wealth and a former Financial Planning Institute of Southern Africa's financial planner of the year