close menu

What to do with your living annuity when you retire abroad

by Niel Pretorius | Jun 11, 2018
  • If you have a living annuity in South Africa but no longer live in The Republic, you will need to make sure that you plan accordingly to minimise your tax liabilities in your adopted home.
    piggy-bank-dollar

    Living annuity currency headaches

    One of the classic dilemmas people who have retired abroad face is how to structure and manage their living annuities back home in South Africa. You cannot externalise a living annuity unless it is below a certain value; typically R50,000 if you took a lump sum on retirement, and getting the income paid abroad can sometimes be problematic and expensive.

    The biggest challenge such South African retirees face, however, is that of the currency mismatch. The living annuity remains a Rand-based investment, with the income paying in South African Rands. In the past two years, the Rand traded in a range of R23.19 and R15.51 to the Pound Sterling. Assuming your monthly income from the annuity is R20,000, and you rely on this income to fund your expenses, the amount received in Pounds would have varied between £1,289 and £862, a difference of £427.

    This is what is known as a currency mismatch – income in one currency and expenditure in another. This is of particular concern as far as the Rand is concerned, as it remains the most volatile currency in the world.

    Unnecessary overinvestment in South Africa’s concentrated market

    This, however, is not where the headache ends. The vast majority of living annuity portfolios we come across are still invested in line with Regulation 28 portfolios, with a maximum of 30% of the fund being exposed abroad. In fact, most providers will not allow annuitants to expose more than 30% abroad, leaving the non-resident annuitant with 70% of his retirement portfolio invested in the JSE, in itself a small and concentrated investment universe which does not present the greatest investment case. The recent Steinhoff debacle makes this concentration risk all too evident.

    It is somewhat confusing why providers would insist on these allocation limits, as living annuities are not subject to Regulation 28, and one can only surmise that it is to protect their asset swap capacities. Fees are another matter that becomes vitally important, with investment charges typically north of 1%. Include the advice, administration and asset swap fees, and you would look at an effective annual cost of 2.5% plus.

    How to expose your annuity effectively to offshore markets

    This is clearly an ineffective solution for non-residents, so we set about trying to solve this problem, or mitigate the negative effects as far as possible. Pleasingly, our efforts were rewarded as one of our South African suppliers came to the party and agreed to allow 100% of the portfolio to be exposed internationally, and at fees which are reasonable.

    Keeping sufficient liquidity in a money market fund to pay the income and fees, the balance is 100% invested in a hard non-Rand currency. This mitigates the effect the currency swing can have on the overall portfolio.

    Assuming a draw rate of 15%, thus keeping 18% in money market, a portfolio consisting of 42.5% global fixed interest and money market instruments and 57.5% in global equities, the total cost will be 1.93% for all layers of the investment. Such a Sterling-based portfolio has not compromised performance either, returning the following results in Sterling:

     

    One year

    Three years

    Five years

    FE risk score

    Portfolio

    4.98%

    21.89%

    41.05%

    64

    FTSE all share

    7.25%

    19.54%

    45.89%

    94

    Asset and geographical allocations of such portfolio look as follows:






    The conclusions that can be drawn from the above are simple – you can have a cost effective, globally diversified solution for your living annuity, which would mitigate the currency mismatch faced by the majority of non-residents who have retired abroad, or who are thinking of retiring from their retirement funds and to start drawing income.


    For more information you can contact our wealth team on wealth@sableinternational.com or give us a call on +27 (0) 21 657 1540.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

    • Man-on-a-rocket
      Are you a UK contractor? Maximise tax-efficiency by using your pension
      Sep 25, 2018  |  by Bill Monty
    • terraced-houses-in-london
      Are you a UK contractor? Here’s how to get your mortgage approved
      Sep 12, 2018  |  by Marlon Borez
    • property-feud
      The hidden dangers of not having a will in the UK
      Sep 07, 2018  |  by Sherron Alexander-Bedingfield
    • carrot-incentive-running-track
      UK pensions: Between a QROP and a hard place? Or is it a damp SIPP?
      Jun 21, 2018  |  by Niel Pretorius
    • house-london
      In the UK, mortgage inaction is pickpocketing thousands of homeowners
      Jun 07, 2018  |  by Bill Monty
    • Hand-currency-blue
      Saying goodbye to South Africa? Financial emigration can give you access to your RA before you turn 55
      Apr 13, 2018  |  by Niel Pretorius
    • Dubai_skyline
      Lessons learned on a trip to Dubai: South Africans take note
      Nov 10, 2017  |  by Mike Abbott
    • Piggy-banks-thinking
      Financial emigration: Transfer your retirement annuities out of South Africa
      Oct 20, 2017  |  by Niel Pretorius
    • row-of-houses-UK
      Bank of England overhauls mortgage affordability rates: Here’s what you need to know
      Oct 09, 2017  |  by Ian Henning
    • saving-money-investing-piggy-bank
      Limited company owners: What to do with your lazy cash
      Oct 02, 2017  |  by Ian Henning
     
     

    South Africa

    Cape Town

    Regent Square
    Doncaster Road
    Kenilworth 7708 +27 (0) 21 657 2120

    Durban

    201 The Annex
    Ridgeside Office Park
    Umhlanga +27 (0) 31 536 8843

    United Kingdom

    London

    Castlewood House
    77/91 New Oxford Street
    WC1A 1DG +44 (0) 20 7759 7514

    Croydon

    5-7 Selsdon Road
    South Croydon
    CR2 6PU +44 (0) 20 7759 7581

    Australia

    Melbourne

    9 Yarra Street
    South Yarra
    VIC 3141 +613 (0) 8651 4500

    Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services License issued by ASIC to deal in foreign exchange (1st Contact Group - AFS License number 335 126).

    Our site will be down for approximately 90 minutes on Saturday 17 November at 09:00 BST. 
    We're carrying out scheduled maintenance to ensure we continue to provide you with the service you've come to expect from us.
    This site uses cookies, read more or close this notice.