In 2001, I took out an offshore retirement annuity (RA) which entailed getting tax clearance annually. The RA was based in Guernsey with Momentum. The agreement was that the RA would be paid out to any bank account worldwide for my retirement.
I continued to pay over a number of years. However, the policy has now matured and Momentum says that I have to bring the full amount back to South Africa and then purchase an annuity from an insurer registered with the Long Term Insurance Act. It needs to be brought back due to Regulation 28.
When the RA was purchased, it was done with all the necessary approvals. I wish to keep it offshore and then purchase an offshore-based annuity. Is this possible or am I forced now to bring it back due to Regulation 28?
Please let me know what to do from here.
Thank you for posing this very interesting question which may be relevant to many Moneyweb readers.
I can understand your frustration, as over the last 20 years since the inception of this retirement annuity (RA) your understanding was that the structure would allow you to have capital paid to you anywhere in the world for your retirement and now at maturity you find that this is not the case.
If I remember these types of RAs when they were launched correctly, I recall thinking at the time that these needed to be explained very carefully to an investor, or the investor could very easily misunderstand what the product could and could not provide.
I must stress though, that relying on my memory going back 20 years or so is not the correct way to provide you with a recommendation in this format.
The best advice I can give you at this time
My suggestion is that you gather up as much information you have on this retirement annuity and consult an independent investment advisor, who will be prepared to analyse it, focusing on the structure and rules that should be stipulated in the policy document.
I would add that you should be prepared to pay this independent investment advisor an hourly fee to analyse this RA for you so that you will receive an unbiased, independent and factual result.
If however this retirement annuity is structured as I remember, then the following would apply:
RAs fall under the pension fund rules in that they can be matured at any time after the investor has turned 55. At that time the investor can only access one third of the capital in cash (some of this may or may not be taxable but I am going to leave this point for discussion for another time). The balance had to be paid into an annuity from which the investor would draw an income, which would be taxable.
Even though you may be disappointed by the fact that you had perhaps misunderstood the structure of this “offshore retirement annuity”, or may not have had the structure of this investment properly explained to you, you may still have enjoyed a number of advantages by having this particular RA.
I believe that we need to at this stage leave what has happened in past alone and focus on the advantages of having this offshore RA.
The advantages you have enjoyed during the term of the offshore retirement annuity:
- The contributions you made to the offshore RA may have been tax-deductible (based on the limits of contributions to RAs);
- During the term any interest earned, dividend distributions received and capital gains would not have been taxable; and
- You would have been invested in hard offshore currency, with access to hard-currency-based underlying funds that would invest your capital in global markets.
What can you do now that the offshore retirement annuity has matured?
In simple terms, normal RA/pension fund rules will apply.
One could leave the capital invested in the offshore RA if you do not yet need to live off the capital at this stage. The capital would remain invested in foreign currency within your offshore RA, and you would not be required to make further contributions unless you wanted to.
Secondly, you could elect to take up to one third in cash. This would be subject to retirement lump sum benefit tax treatment. I would also advise you (or the independent investment advisor that you should consult as mentioned above) to check with Momentum, but I am quite certain that this cash benefit would need to be paid to you in South Africa and in rands.
The remaining two thirds would need to be invested in an annuity from which you would draw an income.
I do note that your wish would be to purchase an offshore annuity.
As we have established, purchasing an offshore annuity would not be possible, but I do know that Momentum Wealth does have an offshore living annuity, which is a South African living annuity that invests your capital in foreign currency in offshore funds.
The income from this offshore living annuity would be paid to you in South Africa in rands and the income drawn would need to be selected by you and be between 2.5% to 17.5% of the capital value per annum. The income, as mentioned, would be taxable.
One could I suppose reinvest the net income from such a living annuity in offshore markets using the offshore investment allowance if one wished, provided the income is not required to be lived on.
In my opinion, I would suggest that you/your advisor contact Momentum and ask if the following would be possible through its investment structures:
- Would it be possible to commute the offshore RA to an offshore living annuity, then have the units held in the fund underlying the RA transferred to the living annuity – thereby effectively avoiding the capital coming back to South Africa, and having it reinvested in foreign currency?
This would avoid any possible loss as a result of any foreign exchange rate fluctuations.
One would need to keep in mind that this would only be possible if the same underlying fund is used in the offshore living annuity as the offshore RA, and provided that Momentum is maintained as the overall product provider.
If the above is possible, then we have in a way kept your retirement capital invested offshore.
In closing, it is imperative that the following be considered …
I would urge that the first step is to have this offshore RA analysed by a good independent financial planner/investment advisor prior to making any final decision, as there is simply not enough detail provided to us in this question to be able to provide a comprehensive response in this format.
Secondly, we need to keep in mind that once a RA has been commuted to an annuity this cannot be reversed.
Thirdly, other aspects should be taken into consideration, such as your own personal financial circumstances which cannot be realistically discussed satisfactorily in this format.
Thank you for engaging with us.
We hope this assists in providing a solution to your investment portfolio planning requirements.