Offshore investing through your Retirement Annuity : rules, risks, and benefits

Note: Asset allocations within 10X funds change regularly as we adjust for market conditions. The asset allocations below are correct as of 18th November 2024. Please check the funds page for up to date figures.

A retirement annuity can be an effective savings method for pre-retirees, allowing you to save steadily and grow your capital while avoiding the risk of cashing out early. Planning for retirement is a crucial financial step for anyone seeking stability and comfort in their later years and retirement annuities are tax-efficient investment vehicles that can facilitate this journey.

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A retirement annuity (RA) enables you to invest part of your income in a retirement fund that follows Regulation 28 of the Pension Funds Act. This setup helps you grow your savings at rates that can outpace inflation, with valuable tax advantages. Your RA provider will allocate your contributions across various asset classes, including equities, bonds, property, and cash, to build a diversified portfolio. Over time, these investments grow, and when you reach retirement, you can use the accumulated funds to secure a regular income through options like a living annuity or a life (guaranteed) annuity.

Beyond simply saving for retirement, plenty of investors are looking to diversify their portfolios internationally, with the goal of reducing exposure to local political and economic risks. Diversified asset allocation and investing offshore can safeguard retirement savings from these uncertainties. While a retirement annuity does not offer the same freedom that a living annuity can give in terms of offshore investments, allocating a portion to overseas markets is still a viable option within your RA. According to Regulation 28 of the Pension Funds Act, retirement annuities can allocate up to 45% of funds offshore.

10X Investments provides a variety of underlying funds within our retirement annuity offering, each tailored to different risk preferences and goals. Our underlying funds offer various levels of offshore exposure to suit your investment strategy – the most notable of these funds being our flagship 10X Your Future Fund. Keep reading to learn a little more about offshore investing with a 10X Retirement Annuity, as well as other ways to protect your retirement savings from inflation risks.

Retirement Annuity Recap

A retirement annuity can form the backbone of your retirement plan, helping you secure financial stability in your post-retirement years by eventually converting your accumulated savings into a reliable income. The 10X retirement annuity combines low fees, competitive returns, and full transparency, allowing you to save confidently toward a comfortable retirement.

When you invest in a retirement annuity, your contributions are allocated across various asset classes, like equities, bonds, and cash. These investments are structured to facilitate the growth of your savings over time. One of the major sellers of an RA is that contributions are tax-deductible, which lowers your taxable income, while any returns within the RA remain tax-free, enhancing your retirement fund’s growth potential. Additionally, RAs provide creditor protection, making them a secure, long-term investment. The funds are preserved until you reach retirement (with a minimum access age of 55 in South Africa), ensuring your savings stay invested until it’s time to fund your retirement.

Once you reach retirement, your RA savings can be converted into a reliable income source. At least two-thirds of your savings will be allocated to income products – a living or life (guaranteed) annuity – while the remaining third can be withdrawn, with a tax-free allowance of up to R550,000 on this withdrawal.

Strategic Asset Allocation & Offshore Investing

Asset allocation in your retirement annuity refers to how money is distributed across different asset classes in the fund underlying the retirement annuity ‘wrapper’. This allocation establishes a balance between growth-oriented assets, which often carry higher volatility, and more conservative assets that provide stability.

With 10X, you have the flexibility to tailor your investment portfolio according to your needs, time horizon, and retirement goals. You are free to choose a portfolio that suits you and your risk tolerance, with a variety of asset classes, including equities, bonds, and offshore options available. If you find yourself with a higher appetite for risk, you could consider allocating more to equities, while conservative investors may prefer a heavier focus on bonds.

By putting some thought into your asset allocation, aiming for diversification, and adjusting your asset mix as your situation changes, you should be able to successfully navigate market volatility while keeping your retirement savings on track. A well-balanced portfolio not only supports steady growth but also guards against inflation, helping you preserve purchasing power and secure long-term financial stability in retirement.

In an effort to safeguard retirement savings against inflation or local market volatility, some pre-retirees look to offshore investing. Offshore investments offer protection against local economic risks, including potential Rand depreciation, by diversifying exposure beyond the South African market.

Retirement Annuity Regulations and Offshore Investments

Across the country, many South African investors are growing increasingly concerned about political uncertainty impacting the Rand and the value of their savings. This has led many to explore different ways to safeguard their retirement savings and enhance capital growth. Offshore investments can often be a promising strategy for reducing country-specific risks, providing access to global markets, sectors, and currencies.

Offshore investments refer to investments made in markets outside of South Africa, allowing investors to access global economies and foreign currencies. Unlike domestic investments, offshore options provide a broader diversification, which can be appealing to investors hoping to boost their retirement savings over the long term. As mentioned, under Regulation 28 of the Pension Funds Act, retirement annuities are limited to 45% offshore investment exposure, but there are also limitations on each asset class specifically, so you’ll want to consider those caps when allocating offshore.

For example, regulation 28 limits the exposure to (local and offshore) equities to a maximum of 75% of the total retirement annuity portfolio. This restriction is in place because of the nature of equities – which generally provide strong returns, but are also often considered the riskiest asset class, leading to short-term losses (due to stock market volatility) if not balanced out. Likewise, investments in property assets, both local and offshore, are capped at 25% of the overall retirement annuity portfolio.

It's also worth noting that while the regulatory limit allows for up to 45% offshore exposure, different RA providers may also have their own policies or rules. Some providers might enforce lower limits based on their own internal risk assessments. Alternatively, some providers might have reached their overall offshore capacity; once a provider reaches the 45% offshore investment threshold across all managed assets, they cannot increase their foreign exposure any further and their investors will encounter restrictions.

Offshore Investing With A 10X Retirement Annuity

The 10X Your Future Fund is structured to offer RA investors a balanced, cost-effective portfolio aimed at long-term capital growth. This flagship fund offers a carefully diversified asset allocation across both local and international assets. It maintains approximately 65.4% in South African assets, including equities, bonds, property, and cash, ensuring substantial exposure to the local market. The remaining 34.6% is invested offshore, adhering to Regulation 28 of the Pension Funds Act. This balanced allocation supports the fund’s goal of minimising risks associated with South African economic volatility while tapping into growth opportunities globally.

10X’s cost-efficient fee structure enhances compounding effects, ensuring more of your returns are reinvested, which is especially critical in long-term retirement planning. By balancing growth and stability across asset classes and maintaining compliance with Regulation 28, the 10X Your Future Fund can set you up to secure solid, inflation-protected returns, and sustainable retirement savings to carry you through your golden years.

Other 10X funds that offer you offshore investment capability in your retirement annuity include the following:

The 10X Income Fund is designed to provide a reliable income stream while preserving capital; this option is often best suited to investors with a shorter time horizon who prioritise stability over investment growth. The fund invests predominantly in low-risk assets, with an allocation of 89.9% in local assets and 10.1% offshore.

The 10X Defensive Fund aims to deliver steady, modest growth with a primary focus on protecting capital. It allocates 75.2% to local assets and 24.8% to offshore investments, ideal for cautious investors focusing on preservation of capital over aggressive growth.

For a slightly more balanced approach, the 10X Moderate Fund focusses on both growth and income by diversifying across various asset classes, with 70.1% invested in local assets and 29.9% in offshore assets.

Rewards Of Offshore Investing

Investing offshore allows you to diversify your portfolios across global markets and reduce concentration risk. Concentration risk refers to the vulnerability that arises when a portfolio is heavily invested in a limited number of assets. Essentially, if a significant portion of your investments is concentrated in a single sector, a downturn in that area can disproportionately impact your entire portfolio.

By investing internationally, you can diversify your investments across various markets and asset classes, alleviating reliance on the performance of any one market. Offshore investments also increase exposure to industries that may not be as prominent in the South African economy, offering a broader range of opportunities. This global diversification strategy is becoming increasingly important for investors aiming to balance their portfolios and minimise local risks.

The appeal of offshore investments generally centres around three key factors: safeguarding retirement savings from risks specific to the South African economy, avoiding concentration risk, and tapping into potentially greater growth opportunities available in international markets. However, while adding offshore exposure to your retirement annuity has its notable advantages, you’ll want to consider the potential risks too.

What About The Risks?

As mentioned, many South African retirees are increasingly turning to offshore investments to reduce the many risks associated with the local economy. Concerns over the weakening Rand and uncertain economic prospects have prompted this shift, as many see offshore investments as a means to protect their retirement income from currency depreciation and potential political instability.

What many fail to realise, however, is that the main risk of including offshore investments in your portfolio is currency volatility. After all, the Rand is infamous for its fluctuations against major global currencies. While the Rand has generally weakened over the long term, short-term exchange rate swings are common. This means that although a depreciating Rand can boost returns on offshore investments, a stronger Rand can have the opposite effect.

This is where you’ll want to refer to your time horizon, and your own personal approach to risk tolerance. Rather than responding to short-term fluctuations with knee-jerk responses, try to keep the bigger picture in mind and consider your long-term objectives. It would take a significant strengthening in the Rand over a longer period of time to make the prospect of investing offshore less attractive – so you need a sense of equanimity in the short term. Also, a holistic view is crucial, as there are more factors in play in your portfolio than simple currency fluctuations – the performance of local and global equity markets, for example.

Safeguard Your Retirement Annuity

Outside of making sure your retirement annuity if looked after through diversification and strategic asset allocation, there are other ways to bolster your retirement savings and set yourself up for a comfortable retirement.

Low Fees and Outpacing Inflation

Fees play a crucial role in shaping the growth of your investment. When fees are low, they support long-term growth, but high fees can gradually eat away at returns, reducing the overall value of your savings. Did you know a 1% difference in fees can mean up to 30% more money in retirement?

Over time, high fees compound, diminishing returns and eroding capital. On the other hand, lower fees allow more of your returns to be reinvested, letting compounding work in your favour. Minimising fees can prolong the life of your retirement savings, combat the drain of inflation on your investments, and set you up for a financially secure retirement.

Just like high fees can eat away at your investment gains, inflation can erode the purchasing power of your returns. Over time, inflation diminishes the real value of your investment, which can prove even more damaging when combined with high fees. However, while inflation is uncontrollable, you do have a say in the fees you pay and the provider you choose. By sticking with a low-fee provider and taking charge of your retirement savings with reliable tools and portfolio management resources, you can make sure you safeguard your retirement savings.