Saving for your retirement is supposed to offer at least some comfort that you’ll have enough in your pension fund to see you through retirement. Unfortunately, this is a reality that’s going to become more and more difficult to achieve for ordinary South Africans because of restrictions on retirement savings.
The most recent spanner in the wheel for folks planning and saving diligently for retirement is that some fund managers and investment platforms are reaching their limit of funds invested abroad, which are also affecting Living Annuities to some extent. The Pension Funds Act restricts certain funds to have no more than 45% of their assets invested offshore. So, once they get closer to that limit, they have to close off new investments into offshore assets.
And that is a huge problem. Not only for those saving for their retirement, but especially retirees with a living annuity.
Living annuity fiasco
A living annuity is a popular and simple way to receive your pension income every month. One of the big attractions is that these products aren’t restricted by Regulation 28 of the Pension Fund Act as retirement investments are, which places restrictions on your asset allocation.
That means you can invest in any asset class and allocate your funds in accordance with your risk profile. Most importantly, you can invest 100% of your funds offshore as a way to preserve your buying power, which would be constantly eroded by inflation, currency weakness and lacklustre domestic returns.
Brenthurst Wealth has been a vocal critic of the damage being done to South Africans’ wealth by policies such as this. So, it should be no surprise that we’re still advocating that clients offshore their assets to the best of their ability.
But if platforms are reaching capacity in their offshore allowance then current and future clients might not be able to get the offshore exposure they need.
Not all doom and gloom
Alarms bells have rung over the past few years, as several notable platforms, such as Allan Gray, Sygnia and Ninety One to name a few, announced that they are now restricting the offshore allocation within Living Annuities, ranging between 60-40%, as opposed to the 100% offshore exposure allowed in terms of legislation.
In fact, we’ve experienced this trend over the past few years with a number of platforms saying they can’t help clients get their maximum offshore exposure.
This is not the case with all platforms however, so investors are not out of options yet, but we don’t know how much longer that will be the case. For instance, the foreign assets will grow in value – and therefore increase their contribution to the whole – just by virtue of a weakening rand. Coupled with the fact that more and more investors are looking to offshore assets to protect against a continuing weaking rand, it’s a matter of time before more investment platforms will be faced with the same dilemma of restricting offshore exposure.
Time to take action
Because this window to secure a decent retirement is closing, I’m urging clients to take action now.
The danger is that your savings won’t be able to keep pace with inflation and a weaking rand, placing you in a losing position if your income is reliant on domestic assets not growing fast enough.
Investors who have relied solely on local equity for growth have been extremely disappointed.
SA vs the World – 10 Years
CASH – 6.89% per annum (P.A.)
CPI – 5.06% P.A
JSE – 8.15%
MSCI World – 16.04% P.A.
If you consider that South Africa is a prominent importer of goods, then it’s easy to see that everything from household goods to fuel, electronics, consumer goods and luxuries will only become more costly as time goes by. Without growth, in dollar and rand terms, of offshore assets I fear that even fewer South Africans will get the retirement they’re hoping for.
So, if you’re over the age of 55 and have been sitting on the fence over what to do with your retirement annuities or preservation funds, then time is running out to avoid a disaster.
What to do
There are a number of options open to you, depending on your circumstances, your goals and your current life stage. All these factors play into deciding of the best way to maximise your offshore exposure in spite of these new hurdles.
I encourage you to speak to your advisor or seek an advisor able to help you find a solution that works for you.
If you’re over 55 you probably have greater flexibility in moving your funds into offshore assets because you’re allowed to withdraw or redirect your retirement savings. This would be true of retirement annuities, but some pension funds only allow withdrawals at a later age.
It’s unfortunate that we have to take the measures, because living annuities are ideal instruments to cater for your retirement. The reality, however, is that if these products cannot offer the level of offshore exposure needed, then you are better served looking for products or funds that do.