Living annuities: Be careful, too much offshore exposure can hurt you

To minimise volatility within a living annuity a suitable amount of capital must always be retained in the currency that you live in.

Press reports and articles written by various parties regularly punt high levels of offshore exposure in living annuities. A certain prominent financial advisor and owner of a respected financial advisory practice regularly advises clients to cash in their retirement annuities and preservation funds and invest the proceeds in living annuities with 100% offshore exposure. This advice is consistent and disregards the exchange rate without any “health warnings” of the dire consequences of a “cheap” rand when externalising your investments. In my view, this is dangerous and quite frankly reckless advice.

One of the most important (if not the most important) factors when it comes to investing is the price you pay for a particular asset. Overpriced assets lead to price corrections which often leads to extended periods of underperformance and capital losses when you draw funds from that investment. These occurrences can be tracked many times over the past 25 years. I mention 25 years because that is generally the duration that retirees must rely on income from investments.

When buying an offshore asset with a weak rand you are increasing the price of that particular asset irrespective how well it is priced in its hard currency!

When you draw income from an investment such as a living annuity, there is another factor that closely follows the importance of the price you pay. It is referred to as “the sequence of returns”. The sequence of returns is crucial when it comes to investments (which includes living annuities) where you draw an income from. The sequence of returns refers to the pattern of returns that your investment will experience over time. Let me explain with an example.

Question: Do you think it matters how the accumulated return over a period is derived?



Return year 1 Return year 2 Return year 3 Return year 4 Return year 5 Return year 6 Total return
1 15% 10% (- 10%) 6% 9% (- 10%) 20%
2 (- 10%) (- 10%) 6% 9% 10% 15% 20%

In the above sequence of returns an investment of R1 000 000 will have the following outcome:

Scenario 1 = R1 183 880.

Scenario 2 = R1 183 880.

In the above example, there is no difference in the five-year outcome. Now let us draw income against both scenarios. To keep it simple let us assume income at an initial level of 3% which amounts to R30 000 per year. By using the same annual returns:

Scenario Return

year 1


year 2


year 3


year 4


year 5


year 6



1 15% -30000 10% – 30000 (-10%) -30000 6% – 30000 9% – 30000 (-10%) – 30000 6,73%
2 (-10%) -30000 (-10%) – 30000 6% -30000 9% – 30000 10% – 30000 15% – 30000 (- 4,32%)

Capital after six years scenario 1 = R1 067 294.

Capital after six years scenario 2 = R956 754.

I want to point out that I used conservative figures in my example over a very short period and a low drawdown. In reality, the scenario is much more extreme considering that the average drawdown in living annuities is in excess of 5%. If we add currency movements within a living annuity the above scenario worsens drastically. Have a look at the following:

If we consider the last 20 years which is a relevant period for living annuities, the following rand /USD movements took place:

Year R/USD

Low value

One year later


New high % R strengthened from low to high


Years to reach previous

Low again

Dec 2001 12.60 5.60 5.52

Nov 2004

56% 14
Jan 2009 10.20 7.10 6.40

Apr 2011

37% 4,5
Jan 2016 15.92 13.00 11.64

Feb 2018

27% 4
Mar 2020 19.00 14.50 13.60

Apr 2021

28% unknown

The above figures show that the ZAR/USD conversion would have caused reductions in your investment value of 56% in 2001, 37% in 2009, 27% in 2016 and 28% in 2020. Today there are still many investors who are reluctant to take funds offshore due to the severe impact on their offshore investments that were made offshore in 2001.

See the graph below indicating ZAR/USD movements over 25 years. It takes multiple years to reach previous lows after an extreme devaluation.

I want to remind you that a weak rand works against the value of a new offshore investment when measured in rands. We want to take funds offshore when the rand is strong (or at least at fair value), not when it is weak! Once the investment is in place, rand depreciation works in your favour on capital investments. However, the valuation principle remains the same on the funds that you draw down from offshore investments.

Unfortunately, human behaviour is our own worst enemy. We tend to be more exuberant during exuberant times which leads us to invest in assets that are overpriced. Conversely, we get depressed during times that investment values come under pressure, when political woes weigh heavy on us and when the rand depreciates aggressively. Unfortunately, these factors have the tendency to move in unison and are fueled by press reports and articles that get human emotions into a spin, people who can least afford it move funds into offshore heavy funds at exactly the wrong times!

Offshore administrators confirm that spikes in offshore investments took place in 2001, 2008/9 and again in 2020 at exactly the times when funds should have been kept locally for at least until the rand stabilised. To add fuel to the fire, the US market entered a severe bear market in mid-2000 and lost 48% over two years. It recovered briefly to 2000 levels in August 2007 just to lose value again due to the GFC where it lost 60% of its value. Recovery only took place in early 2013. It took investors who were invested in USD 14 years to break even from investments made in 2000. If you were a SA investor who took rand offshore in 2001 and invested in the US market, your investment experience would have been dismal. If those funds were within a living annuity and you were reliant on rand income, you would have faced financial ruin if that was your only investment…

My gripe is not about investing in offshore funds within living annuities. All my clients have healthy offshore exposure in their living annuities but very few have 100% offshore exposure. The ones who have 100% offshore exposure live overseas and in foreign currencies. My gripe is about people advising investors to adopt irrational investment strategies at any cost without warnings of what the outcome can be and has historically been!

The most stable and safest asset in the world namely US dollar cash has lost more than 25% on many occasions over the past 20 years because of the rand appreciating after periods of excessive depreciation. As recently as April 2020 the ZAR/USD depreciated to above R19/USD. Today the ZAR/USD is at around R14.30. That simply means that those investors who heeded the call to expatriate their RA’s and preservation funds into 100% offshore living annuities have lost more than 25% just by the currency move.

Against the odds of the “anti-SA” living annuity advisors, the SA equity and property market recovered remarkably over the same period countering their argument on how well offshore investments have done compared to SA assets. Add drawdowns to this and I shiver to think about the outcome. I saw comments in another publication that the losses caused by currency movements and taxes will be recovered within four years in the offshore funds. I don’t know what assumptions they used to derive at that conclusion but their maths and understanding of investments are questionable.

Twenty-five years ago, the rand was trading at R4.60/USD. Today it is at R14.30/USD. That represents a depreciation of approximately 5% per year.

Ten years ago, the rand was trading at R8.10/USD. Today it is at R 14.30/USD. That represents a depreciation of approximately 6% per year.

We know the rand is going to keep on depreciating over the long run, but it is not going to depreciate at 20% per year. It is not even going to depreciate at 10% per year if SA inflation remains within 5% of US inflation and currently there are no indications why that is not possible. Of course, we live in SA and of course, we have problems that may lead to higher levels of inflation. But we can still act rationally and use broadly available information to make informed decisions especially if it comes to the valuation of the rand.

The rand is one of the most liquid currencies in the world. This results in it being used by global investors as a proxy to emerging markets resulting in it being one of the most traded currencies in the world. Rand volatility goes way beyond what happens in SA. Trends in the larger emerging market sector have much more influence on the rand than internal affairs. It swings widely from the worst-performing currency in the world (like in April 2020) to the best performing currency in the world like currently. This is just a trademark of the rand and it is not going to change. Don’t fight it, understand it!

When reading articles, especially “doomsday articles”, please look at the facts and go and search for counter-arguments. All arguments have two sides and somewhere in between those two sides lies the facts and the truth.

The old saying of BS baffles brains is so relevant in the investment environment. The same advisor that I referred to in the beginning is very good at showing comparisons. Unfortunately, the comparisons are BS. Offshore is much more than the US and in particular US tech stocks. Be relevant and be truthful.

You cannot compare the FAANG stocks to SA Property stocks for convenience’s sake and to drive home your point of how bad SA stocks are compared to US stocks. The sectors are totally uncorrelated and cannot be compared at any level.

Unfortunately, these comments resonate with many disgruntled SA citizens and have led to a cult-like following of the advisor. I expect some pushback and probably some nasty comments from them in his defence…

I mentioned earlier that I too have clients with 100% offshore exposure in their living annuities. So, am I a hypocrite? I don’t believe so. Our philosophy is simple. To minimise volatility within a living annuity a suitable amount of capital must always be retained in the currency that you live in. My clients who are 100% exposed to offshore assets live overseas and spend in hard currency. Exposure to SA assets would increase the volatility on their living annuities.

With all the above said, what is the optimal amount of offshore exposure that one should have in your living annuity? That depends on mainly two factors:

  • How much exposure do you have in your overall portfolio across all your assets?
  • What level of income are you drawing from your living annuity?

If we assume that your living annuity represents the bulk of your investments, then I believe the following guide is prudent:

  • If you live overseas and spend in a foreign currency you can have 100% offshore exposure.
  • If 2,5% is drawn, offshore exposure can be up to 75%.
  • If 2,5% to 5,0% is drawn, offshore exposure should be limited to 60%.
  • If 5,0% to 7,5% is drawn, offshore exposure should be limited to 50%.
  • If 7,5% to 10% is drawn, offshore exposure should be limited to 40%.
  • If more than 10% is drawn, offshore exposure should be limited to 30%.

Using the above as a guide it will also be prudent to place two to three years of income in a SA money market fund within your living annuity from where your regular income should be paid from.

We have not touched on the very important topic of asset allocations. The asset allocation must be in line with your risk personality and applied to assets globally. Not many retirees can tolerate the volatility of a 100% pure equity portfolio in their living annuities.

That brings up a totally different discussion namely the prices of different asset classes globally. In most cases, investors will have exposure to cash and bonds in varying degrees in their living annuities. Because offshore cash and offshore bonds broadly provide negative real yields today with no indication that this will change soon, it does not bode well for them in a living annuity. Irrespective of your views on currencies and equity markets, it will only be the unwise who ignore the importance of the inclusion of SA bonds and cash within their living annuities, especially those annuitants who rely on rand income.

Before taking the plunge with your maturing retirement funds, sit down, have a coffee, and gather suitable information as far as your options are concerned. Discuss your needs and concerns with a suitably qualified financial advisor. Avoid the smoke and mirrors that we get exposed to far too regularly, implement a wise investment strategy and enjoy retirement!

I look forward to your comments and questions.

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Marius Fenwick

WealthUp (Pty) Ltd


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Putting all your money offshore when you need to rely on it for income is not a good idea, but I do think it is a good idea to have a large exposure to offshore funds. Investing over half of my retirement money offshore has been one of my best decisions. My LA is split: 60% in international feeder funds, 20% in SA bond fund, with the remainder in SA equity and money-market funds. This allocation has served me well since my retirement nearly 7 years, with double digit returns after withdrawal of 5%. I also have around 70% of my discretionary savings directly offshore. Offshore funds have vastly outperformed local funds, perhaps this will change in future if South Africa ever implements reforms. But currently this seems unlikely to me, so I have chosen to keep the majority of my portfolio offshore. I don’t plan on leaving South Africa, but I believe offshore investments offer better diversification and far greater opportunities.

Good morning Mark.
Well done! It is good to get some endorsement and your experience plays 100% to my theme and my message. Your asset allocation and offshore exposure are also pretty much spot-on as per my article. Do you draw income proportionately across your portfolio or do you make use of the “SA cash-pot” for income payments?
Long may your good returns continue!

Thank you for your response. I draw my income from a money market fund which gave me some peace of mind last year when stock markets fell substantially at the beginning of lockdown.

The USD/ZAR exchange rate is crucial in deciding when to switch funds in your LA to offshore feeder funds. I will not venture beyond 40% of my client’s capital into offshore feeder funds with the remaining 60% in income funds.

5% Money market.
5% Crypto
10% SA bonds.
10% SA property
5% offshore property.
5% SA Equities.
55% Offshore equities.
5% Gold.

Works ok for me. In total my exposure to China is 5%. Should SA equities be more than that? ESKOM? Political instability. Very few proper counters left on JSE. Cant see why. It limits diversification just too much.

As you rightfully remarked to the defense of that certain individual he did not come looking for me I went into the market searching for such a person mainly because:

Not having much knowledge of these matters as an ordinary South African I could see the Rand is on a steady decline and unlikely to recover over the long term. Even worse with EWC, BEE, NHI and Social grants it is likely to tank.

Even following 2008 RSA showed resilience but I believe only because of the the soccer World Cup. A lot of infrastructure build was still ongoing. So my reasons have largely been driven by fear, fear of what the ANC continues to do to the RSA and that far outweighs my fear of a collapse in foreign markets.

I must also add that this certain individual has not advised me to put 100% off shore. A size able chunk of retirement funds remain in South Africa in stable income funds. To portray this individual as an advisor as someone who constantly advises to move all you money off shore is not correct either.

End of comments.



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