From time to time, certain living annuity providers across South Africa cannot offer unlimited offshore exposure to their clients when they retire. That is because investment companies may not, in aggregate, invest more than 45% of their assets under management offshore.
Once they have reached that limit, which some do, they can only allow individual clients to invest up to 45% of their assets in rand-denominated offshore funds to ensure they stay, on aggregate, within the limit.
This limit applies not only to living annuities but also to products such as endowments and certain tax-free savings investments.
At present, we are comfortable that we won’t have to restrict our clients’ offshore exposure, and that we won’t have any limit challenges in the foreseeable future based on the offshore exposure on the balance sheet of Momentum Group.
Yet, even though our clients can invest up to 100% of their living annuity assets offshore, the question is, should they?
Some clients use the bulk of their living annuity income to fund offshore expenses such as paying for offshore property, the offshore education of a dependent, or other expenses priced in foreign currency. Others may have the bulk of their investments in South Africa, especially their income-generating assets, and therefore they want to diversify offshore. For them, the answer may be yes.
Other clients believe that offshore asset classes will consistently outperform the local market, either due to the rand weakening or due to our local investment options not being able to provide as high a return as their offshore counterparts. For them, it may not be as clear-cut as these beliefs could turn out to be wrong. Here, the potential for significant negative performance, particularly during periods of rand strengthening, could materially affect the capital value of living annuities and their ability to provide an income that is sustainable into the future.
The reality is that most clients need to invest a portion of their assets to cover the day-to-day cost of living in rand terms, with many wanting significant exposure to offshore investments to gainthe diversification benefits of investing abroad.
If that is the case, Momentum Wealth’s living annuity, called the Retirement Income Option,may be the living annuity they should consider. The reason is twofold.
Firstly, clients can invest up to 100% of their investment assets offshore.
Secondly, we offer a local investment component called the Guaranteed Annuity Portfolio. The Guaranteed Annuity Portfolio can be selected as any other investment fund or component in our living annuity and offers the same features as a life annuity, namely a guaranteed rand-based income for life. This guaranteed income is not affected by exchange rate movements and may be the perfect fit for your clients’ retirement income needs, especially when their expenses are predominantly rand-based.
This could offer investors the knowledge that they can pay for their rand-based expenses with the income from the Guaranteed Annuity Portfolio, while their remaining assets can provide the offshore exposure they want.
The Guaranteed Annuity Portfolio also provides a highly competitive total return*, one that can be as high as 11% or even 12% when a client lives to an advanced age (see below).
This implies that in our example, which is for a male aged 65, another investment needs to provide a net of fee return of close to 11% for decades to be able to provide the same income as the Guaranteed Annuity Portfolio would if the client lives to the age of 90.
This gives clients the opportunity to build an investment portfolio within their living annuity that suits their personal needs and preferences, with guaranteed income for life and no restrictions on their offshore allocation.
While the allure of offshore investments is undeniable, careful deliberation is essential. By leveraging the diverse offerings of Momentum Wealth, clients can craft a resilient and balanced investment strategy with the aim of safeguarding their financial well-being in retirement.
For more about Reimagining retirement and the Guaranteed Annuity Portfolio, visit our website.
*The total return from the Guaranteed Annuity Portfolio is determined by calculating the internal rate of return at each age.
Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider and part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.
