I would appreciate your advice on the following: I have a retirement annuity (RA) payout to the value of R630 000 and need to invest this for maximum growth. I understand that the investment must comply with Regulation 28, however, I also understand that if I invest in a spread of exchange-traded funds (ETFs) and unit trusts as a living annuity, I am not bound by Regulation 28 and my offshore exposure can be up to 100%.
As I am grossly underfunded for a comfortable retirement, I am employed abroad and receiving a good monthly income. Is the decision to invest in a living annuity with ETFs and unit trusts a good decision? Is it wise to invest 100% offshore? If not, what percentage split is recommended? My decision not to use a financial advisor is to save on fees.
Is it advisable to open a bank account in a tax haven country to deposit my salary for further investment purposes? I am paying for two property bonds in SA – the rental from one is paying for itself and the other is covered to 75% of the bond costs. Is it recommended that these bonds be settled asap before any investments are made from my salary?
1. You have an RA payout, understand the investment must comply with Regulation 28 and that if you invest in a spread of ETFs and unit trusts as a living annuity, you are not bound by Regulation 28 and your offshore exposure can be up to 100%.
Investors can transfer their current RA (after maturity) to a new generation open-ended retirement annuity (still Regulation 28 compliant) or retire from this matured investment. At the point of retirement, investors can withdraw a maximum of one third of their investment capital and purchase a compulsory annuity (life/living annuity) with the remaining retirement capital.
“Maximum investment growth” is a relative term as it implies the maximum investment returns in relation to the maximum risk that investors can endure. Your risk profile (appetite and capacity) is one of the critical aspects to consider before investment to avoid harm to your financial outcome.
The maximum return requires acceptance of maximum investment risk, which poses significant volatility challenges to investors over the medium term.
Living annuities do not need to comply with Regulation 28 as they are regulated under the Long-term Insurance Act.
Rather than focusing on inappropriate investment risk, I would suggest focusing on working for as long as possible until a certified financial planner can confirm your point of financial independence – and then retire.
2. Would investing in a living annuity with ETFs and unit trusts be a good decision?
Living annuities can invest 100% in equities via ETFs, if required, while 100% index-tracking equity investments require investors to be comfortable with a 35-45% drop in their investment value (as seen recently with Covid-19). This investment requires an investment time horizon of 10 years or longer. A certified financial planner will determine how appropriate a 100% equity/ETF strategy is for you by considering your personal circumstances.
3. Is it wise to invest 100% offshore, or what percentage split is recommended? And deciding not to use a financial advisor in order to save on fees.
It is not advisor fees that determine whether investors retire successfully or not but rather the items listed in the following article. Investors generally do not retire successfully due to procrastination, emotional or financial mistakes driven by fear or greed.
No, it is not prudent to invest 100% of your retirement savings offshore if you are planning to retire in South Africa. Start off with 30% foreign exposure and increase this in line with your risk profile (appetite/capacity) and time horizon (minimum 10 years). Increase your foreign exposure as and when the rand is relatively stable.
Investing offshore is definitely not risk-free or guaranteed to deliver higher returns over the long-term.
4. Is it advisable to open a bank account in a tax-haven country to deposit your salary for further investment purposes?
I do not see cash (and especially foreign cash) as an adequate investment class for long-term investment return purposes. Cash is better suited as a short-term parking facility for periods shorter than two years or as a cash reserve to pay for an existing obligation payable within two years.
5. You are paying for two property bonds in SA. Is it recommended that these be settled before any investments are made from your salary?
South African physical property values have in general not performed well over the last couple of years (FNB’s House Price Index shows average annual house price growth to 3.6% year on year for 2019, from 3.8% year on year in 2018). Rental income has not kept up with rising property-related costs and hence the classic crocodile jaws are closing in on property owners.
For this reason, I suggest that you follow a diversified countercyclical investment approach:
a) Acquire new investment property when markets are down (by financing through your financial institution) to rent out. Settle the bond as soon as possible, especially during low-interest rate and strong foreign currency cycles. This will give you more financing leverage and less credit pressure during difficult economic times.
b) Pay off this mortgage according to affordability.
c) Sell these properties under normal/favourable market conditions, at your target price, when paid off. Do not sell during market panic or distress.
d) Reinvest this capital in the equity/listed property market after speaking to a certified financial advisor. It’s even better if you can reinvest when everyone else is selling.