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South African expats get access to international living annuity

New product limits SA exposure for South Africans living abroad.

South Africans living abroad and invested in South African retirement annuities (RAs) will be able to transfer their investment to a living annuity with full offshore exposure through investment group Sable International.

On retirement, South Africans with RAs can take out a third as a lump sum and transfer the balance to a living annuity where they can draw down 2.5% to 17.5% per year.

Their RAs were invested in portfolios with a maximum of 30% offshore exposure in terms of Regulation 28, and while this threshold does not apply to living annuities, most providers keep their asset-swap capacity for big corporate clients and high net worth individuals, leaving other investors with a similar threshold to their RAs.

Niel Pretorius, wealth advisor at Sable International, says 100% of the Sable International Living Annuity will be invested offshore using globally diversified offshore funds, via an asset-swap mechanism with Momentum Life.

He says Sable identified a problem that clients living internationally experience, where they sit with retirement income denominated in rands, and with at least 70% of that tied up in the SA economy. “It makes no sense if they are spending in pounds, for example, but most of their exposure is to the rand and the SA economy.” 

Currently, the exchange rate can mean a variance of 10% in a month in the value of their portfolio as well as draw downs, he says. 

Sable subsequently structured an agreement with Momentum to give Sable clients 100% offshore exposure. “We are taking the rand out of the equation, and with our portfolios having global exposure, the exposure to the South African economy is typically less than 1% – we are moving the economic risk and the currency mismatch,” says Pretorius.

Income, however, is paid in rands, but exposure is limited to the day clients receive that income.

“The offshore living annuity provides a sorely needed solution for expats abroad with significant assets in South African living annuities,” says Mike Abbott, director of wealth at Sable International.

“The lack of options available is due to the peculiarities of the South African pension market, which don’t allow transfers abroad for pensions.

“That issue, along with asset-swap capacity constraints, which are a function of exchange control, mean offshore-invested living annuities aren’t widely available – despite the obvious demand.

“Our solution not only addresses that problem but uses low-cost, cutting-edge investment solutions only available to a limited number of advisers.”

Momentum provides Sable with administration and asset-swap capability, and the funds are put into portfolios designed by Sable and fund manager MitonOptimal in conjunction with local and offshore fund managers.

Sable offers a range of portfolios for seven different risk profiles, mostly in lower-cost smart beta funds, with the option to combine with active funds.

Portfolios are designed around 14 000 global securities typically weighted in a similar fashion to the overall market, with the largest exposure being to the US. 

The product suits former South African residents with a minimum of R1 million to invest. Total ongoing fees are also reasonable and typically lower than those currently being paid by clients in overall charges.

Pretorius points out that to draw income, funds are paid out from South Africa – so there are still foreign exchange risks on that transfer of the money (together with the risk of South Africa tightening capital controls and reducing asset swap capabilities).

But other risks are mitigated. “For people abroad relying on this income, volatility of the rand and virtually no growth on JSE in the last three years has been a massive issue,” says Pretorius. “To get them into a portfolio where currency is irrelevant, and in markets where there has been growth, makes a huge difference.”

Without having even gone to market, there has already been considerable uptake of the new product, says Pretorius, with many existing clients transferring their living annuities. 

Brought to you by Sable International.

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Living Annuities do not have the requirement to comform to regulation28 which means that you can have exposure of up to 100% offshore assets with any living annuity. The income will typically pay into a blocked rand account if the individual has emigrated. Regulation28 only applies to retirement funds (pension, provident, RA) before retirement which is where your exposure to property, offshore assets, african equities and other classes may be limited.

Ask for a full, thorough disclosure of all fees before considering this product. There are various parties involved and all charge a fee. Living annuity holders have plenty of Rand-feeder fund options they can include in their portfolios. This gives them access to top-quality offshore funds and they can have 100% offshore exposure in this way, at a far lower cost. These funds are also all FSCA approved so some investor protections are applicable, which typically won’t be with the direct offshore options mentioned in the article. Remember, your living annuity can only be accessed in SA and in Rands, you’ll never be able to access it outside of SA and in a foreign currency, not with the legislation in place currently.

What Sable is offering is nothing new. I concur with the other commentators that Currently South African living annuities offered to both local and overseas based retirees can be invested 100% offshore through R.S.A. based investments. What is different in the Sable offering?

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