Don't shy away from offshore investments in your Living Annuity

If you are a retiree with a living annuity or are close to retirement and looking at investing in a living annuity, you need to consider to what extent you should be investing offshore.

There are definite advantages to having offshore exposure in your living annuity, but there are also risks, and you need to weigh up the benefits against the risks in line with your personal circumstances, says Brett Mackay, Investment Consultant at 10X.

"I often speak to people about their living annuities, and a common question is how much offshore exposure one should have. I don't think there is a single answer that applies to everyone – it depends on each individual's situation and risk appetite," Mackay says.

The benefits of offshore investment in your Living Annuity

He says the three main advantages of investing offshore via a living annuity are:

No restrictions on offshore exposure

Regulation 28 under the Pension Funds Act imposes limits on a retirement fund’s offshore exposure: currently, no more than 45% of the portfolio may be invested outside South Africa. But living annuities are not governed by the Act.

“Unlike retirement funds, living annuities are not regulated by Regulation 28, so you can have 100% offshore exposure if you want it. I have clients who don’t necessarily need the retirement income, but are retiring from their preservation funds and retirement annuities and taking out living annuities because they can get more exposure to the overseas markets than a retirement fund would offer them,” Mackay says.

Protection against a weaker local currency and economy

Mackay says the current demand for investing offshore is driven by worries about the local economy. “There are common concerns about South Africa’s future and the exchange rate. Clients say to me: ‘I want my funds to be invested in overseas markets so that when the rand weakens I can benefit.’”

He points out that offshore exposure in a living annuity is achieved through locally domiciled funds that invest in overseas markets but are denominated in rands. Indirect offshore exposure is through investments in JSE-listed global companies. The products are designed for retirees drawing an income in rands.

Diversification

Investing offshore offers you greater diversification than investing locally because the investment universe is so much larger, and it contains the world’s greatest companies. Mackay says the MSCI World Index, for example, which underpins the 10X MSCI World Index Feeder Fund, captures the performance of more than 1 500 companies in 23 developed countries. They include not only global tech giants such as Apple and Tesla, but household names such as Coca-Cola and Johnson & Johnson.

The risks of offshore investments in your Living Annuity

The main risk that comes with investing offshore is exchange volatility risk. Although the rand has steadily weakened against the world’s major currencies over the long term, the exchange rate can fluctuate from month to month. This comes on top of the other risks you would face even in local investments, such as equity market volatility.

Mackay says people retiring at 60 or 65 can afford to be in an aggressive portfolio – and reap the superior long-term returns – because they potentially have many years ahead of them in retirement. 10X’s living annuity investment brochure explains further:

At retirement, you may need your living annuity to last for 20 years or longer. Therefore, contrary to popular belief, you are still a long-term investor and should take a long-term view when selecting an investment portfolio.

However, 10X advises switching to lower-risk portfolios as you get older. “Not only should this be done, but I often find that as clients get older, they get more nervous – they need more certainty and are less likely to be receptive to market volatility,” Mackay says.

Choice of portfolios

10X offers a choice of six low-cost living annuity portfolios, ranging from a conservative fund with 38% offshore exposure (including indirect exposure) to one fully invested in the MSCI World Index. There are three Regulation-28-compliant portfolios – the 10X Defensive Fund, 10X Moderate Fund and 10X Your Future Fund – and three international portfolios – the 10X International Medium Equity Portfolio, 10X International High Equity Portfolio, and 10X MSCI World Index Feeder Fund.

For more information on investing in a 10X Living Annuity, speak to a retirement consultant.