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Is it advisable to draw the max from my LA and reinvest the monies offshore?

There is no benefit to what you are proposing, and the risk of incurring a higher tax liability.

I have a living annuity in South Africa. As a hedge against financial uncertainty in SA, I want to withdraw the maximum allowed annually and reinvest the monies in offshore portfolios. In summary: draw 17.5% from my Investec living annuity, retain 5% for my needs, and invest the remaining 12.5% offshore. In theory, is this a good idea or not?

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There are several factors that need to be explored in detail in order to help you with an analysis of your options and the potential risks associated with those options. Due to the scope of this response, I would recommend that you explore this in further detail with a professional financial advisor.

There are four main aspects to consider in answering your questions.

Local vs offshore asset allocation

Living annuities have much more flexibility in terms of what they can invest in when compared with retirement vehicles, which have to comply with Regulation 28 of the Pension Funds Act. Your living annuity can have 100% exposure to offshore assets. From an asset allocation perspective, there is no benefit to what you are proposing.

Tax

Income from a living annuity is taxed as income in your hands. At an annual withdrawal rate of 17.5%, you could be incurring a high tax liability in order to invest the money into an offshore portfolio via a different investment vehicle.

The following examples are based on the assumptions as outlined.

Illustrative scenario 1
Age 70
Value of the living annuity R5 000 000
Annual withdrawal rate 17.50%
Annual income R875 000
Annual tax liability (excl rebates) R236 367
Marginal tax rate 41%

 

Illustrative scenario 2
Age 70
Value of the living annuity R5 000 000
Annual withdrawal rate 5%
Annual income R250 000
Annual tax liability (excl rebates) R48 528
Marginal tax rate 26%

The difference in the tax payable between scenario 1 and 2 is R187 839, which is 30% of the additional amount of R625 000.

Investment vehicle

Based on your widely-shared concern around the uncertainty in South Africa, one may argue that you may feel more comfortable using an investment vehicle which is outside that of a living annuity or pension fund vehicle. There have been widespread fears around the topic of prescribed assets and political instability, which has caused some investors to choose to externalise their money at virtually any cost.

As it currently stands a living annuity has many advantages for an investor who seeks to live and retire in South Africa, not least of which is that investors who fear the “financial uncertainty in SA” have the ability to have as much offshore exposure as they would like.

The trouble with what you are proposing is that it comes at a cost through potentially triggering a high tax liability in order to restructure your investment through a different investment vehicle. This decision, therefore, needs to be considered in the context of your long-term financial plan and the viability of your investments’ ability to pay you a sustainable income stream in retirement.

Taking an income from an offshore investment

When it comes to taking an income, volatility matters. Research has shown that taking an income from a volatile investment could lead to poorer long-term performance due to the sequence of return and currency risk. If you were to restructure your investment into offshore portfolios, you need to be cognisant of taking an income in rands from a potentially volatile offshore investment.

Concluding thoughts

One of the reasons people elect to take the full 17.5% withdrawal from their living annuities is in order to convert as much of their pension into discretionary money as is possible. That does not seem to be your objective.

First and foremost, the question is whether you can afford to restructure your investment without impacting your investment’s ability to pay you a sustainable income in retirement.

If you are unable to financially incur the additional tax, then you should carefully consider whether or not this is the most prudent course of action.

Do you have any questions you would like answered by registered financial planners?

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COMMENTS   11

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Clearly all the advisors have no understanding of exchange control – private individuals can not keeps funds overseas and companies have to repatriate overseas funds back to RSA within 180 days unless they have special reserve Bank approvals.
Why these hacks keep talking about offshore is beyond me and it is spreading false information

There are no prohibitions on South Africans opening a bank account offshore. All that is required is that you declare it to SARS.

Do a google search on the term to see what options are available to you.

If you’re pushing out more that a million a year you need special dispensation, otherwise its relatively easy for us lesser poorer mortals.

If banks aren’t your thing, you can open a trading account in the US, I personally used Ameritrade. Push the money over and do your business.

Private individuals CAN keep money overseas , it’s called a Foreign Investment Allowance. Offshore etf’s are cheaper and cgt is calculated in hard currency (generally reducing taxable gains). Best solution is low cost offshore etf’s like Vanguard for at least half your discretionary portfolio but no adviser’s fee strategy would advise that of course…

Very thought provoking article, as being on the minds of more South Africans (post retirement) as what you’d think.

The writer cautiously mentioned the “fear of financial uncertainty in SA”….in italics, almost like it’s an imagined fear (well, in that case, let me introduce Magnus H to you 😉

Yes, it can be part of your strategy to drain your LA as fast as possible (to invest the excess after tax abroad), but you’ll have to bite the bullet as far as (higher) income tax which goes along a max 17,5% drawdown rate will bring.

On the other hand, no one knows how high the Individual Income Tax rates will still become in future (to fund the ANC’s failed policies)
(….what would be a Marginal tax rate of 26%-band TODAY on R250,000 p.a. income….in 2030 that R250,000 could be in the upper 40% bracket….who knows.)
Never make future assumptions based on the notion of current Individual tax rates…. It has effectively been pushed higher the past few years, as SARS’ bracket creep adjustments were far less than inflation.

I did comment but in Moneyweb’s infinite wisdom they have suppressed my comments. Can’t understand this crowd they invite comments but then they apply questionable censorship

Graham: did you perhaps repeat the false claim that south africans cannot keep offshore investments offshore?

Johan – both comments are now visible. Pray elucidate us mere mortals as to how a RSA citizen and conduct an overseas bank account and operate that account from RSA

Graham: it is dead easy, unless you have more than R10m per year per person to deal with, in which case it is still possible. Any South African can open a foreign bank account / brokerage account. Obviously those remain part of your SA assets and the income is taxable here as an SA tax citizen.

You are probably confusing the issue with how long an SA company that earns foreign revenue can leave that cash in a foreign denomination.

Johan – I approached Barclays in London with a view to opening an account with the intent to then open a trading account so that I could invest in the LSE. They made it quite clear that I would have to appear in person to open the account, give references, and provide residency status and place of domicile in the UK.
So if you can give an alternate mechanism to open an account with a Bank in London and also have a trading platform – would be much appreciated.

There is no need to convert your LA into discretionary capital in order to invest offshore. Split your portfolio into two pockets. Invest say R1.5m in a money market portfolio.Draw your monthly income from this money market fund which will hopefully last you two years or longer. Invest the balance of R3.5m into two or three offshore Global equity feeder funds. Top up your MM fund after two years from your offshore portfolio.

End of comments.

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