If you are nearing the end of your working career and about to retire, you have to have your wits about you as some decisions you make are irreversible.
Tip one: Retirement and emigration
There are a lot of things to consider when you emigrate. Retirement considerations are just one of them. If you are thinking of emigrating and are nearing retirement age, think twice before you formally retire from your retirement fund. The reason for this is that while you can transfer retirement fund assets offshore, current legislation makes no provision for the offshore transfer of assets from either a living annuity or guaranteed annuity fund.
How could this play out in practice? For members of retirement annuity funds, it is simple; there is no compulsory retirement age in a retirement annuity fund. This means that if you are about to retire and are thinking of emigrating you can simply keep all your assets in the retirement annuity and transfer the retirement annuity offshore once you have decided to formally emigrate. The transfer would be subject to taxation and other regulatory processes of course.
If your pension is an employer-based pension, it could be a little more complicated. As there is no formal retirement age in South Africa, employer-based funds are free to stipulate their prescribed retirement age in fund rules.
However, if your retirement fund has a retirement age of 60, for example, and you wish to delay your retirement, the solution would be to move your retirement assets to a preservation fund, where your assets can remain while you make up your mind about your retirement destination. Any good financial advisor will be able to help you with this process.
Tip two: Living annuities and high offshore exposure
When you are ready to transfer your assets from your retirement fund to a living annuity, it is important to choose an independent financial advisor and not a ‘tied’ financial advisor to help you choose a suitable annuity fund.
In February 2018 the offshore allocation limits for institutional investors were increased from 25% to 30% and the special allocation to African investments (outside South Africa) from 5% to 10%. However, there are no restrictive ‘Regulation 28-type’ rules for living annuities; the current rules of living annuities allow investors to invest where they wish and across all asset types.
In theory, retirees could invest 100% of their living annuity fund in offshore equities.
In practice it is a little different. Not all asset management companies that are licensed to sell and manage living annuities allow investors to allocate 100% of their living annuity offshore. This is because asset management companies are subject to ‘manager’ exchange rate rules which cap exposure to offshore investments. The permissible limit is calculated as a percentage of the institution’s total assets under management.
According to the South African Reserve Bank, institutional investors may not exceed 30% of retail assets in the case of retirement funds and underwritten policy business of long-term insurers, and 40% of retail assets in the case of registered investment managers, collective investment scheme management companies and the investment-linked business of long-term insures. Institutional investors are allowed to invest an additional 10% of their total retail assets in Africa. Institutional investors include all retirement funds, long-term insurers, and collective investment scheme management companies for exchange control purposes.
This ‘manager allowance’ is used by collective investment scheme managers in all rand-based funds that have offshore exposure, including rand-denominated feeder funds. Periodically such funds have to be closed to new investments, as the manager allowance has been exceeded.
With respect to living annuity investments (which are usually invested in collective investment schemes), asset management companies manage this administrative task in different ways. Some allow offshore investments up to the point they breach their limits and then close to new investments, while others state upfront that they cannot offer investors access to offshore funds beyond pre-stated limits.
‘Tied investments advisors’ (those that work exclusively for a particular asset management company) might fudge these important details in their efforts to retain clients. An independent financial advisor would have no such conflict and be better positioned to advise clients about the position of competitors with respect to their position on offshore access, their current capacity, and their position on the treatment of existing investments in the event of management companies breaching the all-important exposure level.
Note: We do not necessarily recommend investing offshore as a default decision. We are in favour of offshore allocation as part of a diversification strategy, and at times of rand strength.
Tip three: Where to draw your income
This tip only applies to those lucky few who have saved discretionary money, inherited money, or perhaps sold a business and retained such proceeds out of the retirement fund pool.
Current legislation stipulates that living annuities do not constitute ‘deemed property’ in your estate, so assets in living annuities are therefore not subject to estate duty. The only exception to this rule is if you fail to nominate a beneficiary(ies) or if named beneficiaries cannot be traced. If either of these events occur, assets in your living annuity will be classified as deemed property and be liable for estate duty.
According to Sars, estate duty is payable on the estate of every person who dies and whose net estate is valued at more than R3.5 million. Estate duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above R30 million.
The implication of this is that if you can afford to live on discretionary investments and not dip into the proceeds of your living annuity, you will be able to pass the proceeds of your living annuity tax free to the named beneficiaries of your living annuity.
And to make this more appealing, your living annuity investment would be worth more than a discretionary investment (in the same investment environment), as living annuity investments are exempt from capital gains tax and dividend withholding tax. They are only subject to income tax when drawdowns are made.
Please note that the information in this article is designed for information-only purposes and does not constitute advice. For more details on any of the material above please contact a financial advisor.