2020-11-12 Moneyweb Readers Question

I have a living annuity in South Africa. As a hedge against financial uncertainty in SA, I want to withdraw the maximum allowed annually and reinvest the monies in offshore portfolios. In summary: draw 17.5% from my Investec living annuity, retain 5% for my needs, and invest the remaining 12.5% offshore. In theory, is this a good idea or not?

There are several factors which need to be explored in detail in order to help you with an analysis of your options and the potential risks associated with those options. Due to the scope of this response I would recommend that you explore this in further detail with a professional financial advisor.

There are four main aspects to consider when answering your questions.

Local vs offshore asset allocation

Living annuities have much more flexibility in terms of what they can invest in when compared to retirement vehicles which have to comply with regulation 28 of the pension funds act. Your living annuity can have 100% exposure to offshore assets. From an asset allocation perspective there is no benefit to what you are proposing.

Tax

Income from a living annuity is taxed as income in your hands. At an annual withdrawal rate of 17,5% you could be incurring a high tax liability in order to invest the money into an offshore portfolio via a different investment vehicle.

Illustrative tax scenarios
Scenario 1
Assumptions

age 70
Value of the living annuity R5 000 000
Annual withdrawal rate 17.5%
Annual income R875 000

Annual tax liability (excluding rebates): R236 367
Marginal tax rate: 41%
Scenario 2
Assumptions

age 70
Value of the living annuity R5 000 000
Annual withdrawal rate 5%
Annual income R250 000

Annual tax liability (excluding rebates): R48 528
Marginal tax rate: 26%

The difference in the tax payable between scenario 1 and 2 is R187 839 which is 30% of the additional amount of R625 000.

Investment vehicle

Based on your widely shared concern around the uncertainty in South Africa, one may argue that you may feel more comfortable using an investment vehicle which is outside that of a living annuity or pension fund vehicle. There have been widespread fears around the topic of prescribed assets and political instability which has caused some investors to choose to externalise their money at virtually any cost.

As it currently stands a living annuity has many advantages for an investor who seeks to live and retire in South Africa, not least of which is that investors who fear the “financial uncertainty in SA” have the ability to have as much offshore exposure as they would like.

The trouble with what you are proposing is that it comes at a cost through potentially triggering a high tax liability in order to restructure your investment through a different investment vehicle. This decision therefore needs to be considered in the context of your long-term financial plan and the viability of your investments ability to pay you a sustainable income stream in retirement.

Taking an income from an offshore investment.

When it comes to taking an income, volatility matters. Research has shown that taking an income from a volatile investment could lead to a poorer long-term performance due to the sequence of return and currency risk. If you were to restructure your investment into offshore portfolios, you need to be cognisant of taking an income in rands from a potentially volatile offshore investment.

Concluding thoughts

One of the reasons people elect to take the full 17.5% withdrawal from their living annuities is in order to convert as much of their pension into discretionary money as is possible. That does not seem to be your objective.

First and foremost, is the question of whether you can afford to restructure your investment without impacting your investment’s ability to pay you a sustainable income in retirement. If you are unable to financially incur the additional tax, then you should carefully consider whether or not this is the most prudent course of action.

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