I am 24 years old and have been employed for just over 1.5 years. I have not invested in a retirement annuity (RA) at present (my company does not offer pension fund contributions either).
I was recently researching investing into an RA as I would like to start saving for retirement – the EasyEquities RA seems perfect for me as I want to pay the lowest fees possible.
However, I am planning to emigrate to the Netherlands (I have a Dutch passport) in the next one to two years.
Should I start investing in a South African RA if I will be emigrating to Europe in the next few years? What are my options here and how best should I move forward i.e. would it be wiser to invest in a tax-free savings account (TFSA) or a normal investment account and not a RA?
All advice is welcome.
Emigrating to the Netherlands must be very exciting but I am sure that you are equally anxious about your future adventure.
Your question of whether you should start investing in a South African-based retirement annuity before you emigrate has a simple answer – no.
Although retirement annuities offer very attractive tax incentives to individuals, one must be mindful of the limitations to access the capital prior to retirement. Under the new legislation, you must cease to be a taxpayer for a period of three years before you will be allowed to access your RA proceeds. The proceeds will also be subject to retirement withdrawal taxes.
The biggest factor however in my opinion is the limitation of Regulation 28, where you cannot invest more than 30% in offshore assets.
The fact that you will be living, earning, and retiring in euros does lead to a portfolio that should be euro- and hard currency-biased.
Before you decide how and wherein to invest, there are some factors that you must consider:
- Have you set aside sufficient funds to fund the costs of your emigration?
- Will your emigration costs be funded in rands or euros?
- Do you have debt?
- Do you have sufficient cash in euros to set you up in the Netherlands?
- Are you familiar with your investment options in the Netherlands?
If you currently have debt, your first goal should be to pay off the debt prior to emigration – especially credit card debt.
Your second goal should be to accumulate sufficient cash in both rands and euros to make the transition from South Africa to the Netherlands as smooth as possible.
If you are in the fortunate position to have sufficient cash in euros and rands and your emigration costs have been secured, then it will make sense to start investing in a TFSA. Currently, the annual contribution towards TFSA investments is limited cumulatively to R36 000 per tax year and the investment is tax-exempt. This is particularly important when you cash in the investment when you emigrate, seeing that no income tax or capital gains tax will be levied on the growth in the TFSA investment.
You can also invest in a TFS investment with 100% euro exposure. Normal investment principles apply, namely the longer the anticipated investment term is, the more equity exposure you can include in the investment and vice versa. If you need to accumulate cash, then invest in a euro cash feeder fund within the TFSA. The TFSA will eliminate capital gains tax on currency depreciation should the rand depreciate against the euro over the next two years.
If you are in a position where you have additional capital and a fair amount of free cashflow monthly, then you can consider investing directly offshore via one of the offshore platforms. When you are in the Netherlands you can continue with the investment.
Once you are settled in the Netherlands you can explore its equivalent to retirement annuities and its tax-free investments.
Enjoy your last two years in South Africa. I am sure you will be back to visit our great country.
Good luck with your future endeavours.