Over the last few years, the government has slowly been raising the limit on how much investors in pension funds and retirement annuities could hold offshore. At this year’s budget, this was raised from 30% to 45%.
The decision has been widely welcomed because it has some very positive implications.
While there are some great companies listed on the JSE, they are only a fraction of what is available globally. By value, our local market is about 0.5% of the world’s market capitalisation. That means that investors that had to keep 70% of their assets at home, were missing out on a lot of opportunities elsewhere.
The 45% allowance means that it is now possible for South Africans to build much more diversified portfolios. And it makes retirement annuities much more attractive, since investors aren’t as restricted in where they can put their money.
But this doesn’t necessarily mean that every investor should be changing their portfolios straight away to get their global holdings up to 45%. While there are many reasons to increase offshore exposure, it’s not as simple as saying that investing globally is always more desirable than investing in South Africa.
Recent experience bears this out. Over most of the past decade global markets have performed much better than the JSE. But more recently, South African shares have done much better. There are always cycles to markets, and nothing is ever a one-way bet.
This means that investors should consider a number of questions when thinking about their offshore allocation. And the answers they come to will differ from one person to another.
The first thing to think about is how long you are investing for. If you are planning for a retirement that is decades into the future, it may well be a good idea to use your full offshore limit. This is because, over long periods, the extra diversification can both reduce your risk and increase your potential sources of return.
What you should never forget, however, is that the rand is a currency that never sits still. Its history clearly tells us that it can experience big swings – both positively and negatively.
If you are investing for only a few years, this can have big impacts on your money. In any year, global stocks can easily go up 10%, but you still lose money in rands because the local currency has moved 20% the other way.
That is a big reason why you need to think about how much risk you can take, based on how long you are staying invested.
If you are going to move more money offshore, you also need to think about whether there will be tax implications. If you are just changing the allocations within a retirement annuity, this isn’t an issue. But if you are selling other local investments in order to get more offshore exposure, you need to calculate whether that cost is worth it.
It’s also worth bearing in mind that, right now, the general view is that South African assets – both shares and bonds – are offering good value. And they have been performing well. If you are going to put more offshore, this might not be the best time to do it. It might make more sense to stagger it over time.
A final consideration would be what you ultimately want the money for. If your plan is to emigrate or retire overseas, then it can be difficult to get your money out of a local retirement savings vehicle. Last year, the government passed a law that anyone who left the country could only withdraw their retirement savings after no longer being tax resident in South Africa for three years.
There are ongoing debates about how this will work, but that is a long time to have to wait for your money. So, even though the higher offshore limits and tax benefits inside a retirement annuity are attractive, you might not want to run this risk if your future plans are outside the country.
The most important thing to bear in mind is that everyone’s circumstances are different. How much to take offshore will therefore differ from one individual to the next. As always, it’s best to get good advice to suit your particular needs.
To discuss how you should treat the new offshore allowance, speak to a professional.
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