BOITUMELO NTSOKO: Welcome to the Money Savvy podcast. I am Boitumelo Ntsoko. For many South Africans working abroad and perhaps considering living there permanently, the big question is what to do with their retirement investments in South Africa. The recent amendment to legislation governing retirement funds makes the situation even trickier to navigate.
Joining us on this episode to share some guidance on this issue is Elke Brink, who is a wealth advisor at PSG Wealth. Welcome, Elke.
ELKE BRINK: Hi, Boitumelo. Thank you. It’s always good to be here.
BOITUMELO NTSOKO: What should you consider when weighing up whether to keep your investments in South Africa or move them offshore?
ELKE BRINK: I think this is becoming such a relevant topic for so many South Africans. More and more individuals are moving abroad, not only temporarily. Many people are emigrating at the moment.
But there’s also this scenario that a lot of people are just moving for a few years and maybe keeping open their options of coming back. One of the main questions I get a lot is: “Do I cash out my retirement funds, specifically in South Africa, and take them abroad with me?”
From a tax perspective that is, unfortunately, one of the decisions that actually hurts you quite a lot, because the tax implication is very high when withdrawing and taking these funds abroad.
So in most cases, we’ve been advising investors – and we’ll get into more depth with this topic today – to ensure you are optimising the best of both worlds, keeping certain portfolios and specifically retirement products in South Africa and ensuring they are managed optimally, and then rather starting new offshore investments on the global side.
But [we don’t advise] taking on the tax implication and moving it abroad. It’s not necessary.
BOITUMELO NTSOKO: What benefits do the changes in Regulation 28 now hold for a portfolio remaining in SA?
ELKE BRINK: I think this is one of the most wonderful changes that came into effect in our country. One of the main critique points a lot of investors had to Regulation 28 – this now applies to any retirement product before retirement, should it be a retirement annuity, should it be a pension or a provident fund with your company, or should it be a fund that you’ve already preserved in your own capacity, so a pension or a provident preservation – you were always limited to 30% offshore exposure within this product.
Recently the legislation has opened up so that you have the scope to move up to 45% offshore.
That means, especially as a South African citizen maybe living abroad now, you can actually have the best of both worlds. You can still have this product that’s tax-efficient, so you don’t have to take the tax hit of paying quite a lot of tax on different sliding scales – which we can touch on now – but you don’t have to take on the tax implication but you do have the benefit of diversifying optimally and at least structuring 45% of your portfolio offshore.
So I really do see that as benefiting from both worlds. There is still a lot of value to be found in being invested in South Africa.
Firstly, you’ll have this benefit now of having increased offshore exposure when it comes to equity exposure. But when it comes to other asset classes in your portfolio, South Africa is actually very positive when it comes to cash and bonds.
So when we look at the global environment, there’s not much value to be found in cash and bonds at this stage where you’re basically earning a zero return, whereas in South Africa you can at least still expect the return [of around] 5% for cash and, depending on exactly what bonds you’re investing in, between 5% or 7% or sometimes 8%.
There are definitely a lot of fixed-income asset funds that are providing a lot of opportunity in South Africa – which you’re not getting outside this country. So I wouldn’t be too negative, even if you’re not living here anymore, to invest [here].
BOITUMELO NTSOKO: You touched on the tax implications of moving your funds abroad. Could you maybe give us more information on that?
ELKE BRINK: I think that’s where most investors hurt themselves too much, while I think there’s a lot of value still to be found by just ensuring your investment is managed optimally on this side. Basically what it just depends on [is] what phase in your life you’re doing it at. Are you doing it before the age of 55, or after the age of 55 where essentially you can technically retire from a product at the age of 55?
Before 55 you work on a withdrawal table. This is now specifically pertaining to retirement products. So accessible types of funds – I’ll explain those now – are treated a little differently, but the major [question] we get is: “What do I do with my retirement funds?”
I think if it’s someone that’s moving out of the country, [and] the mindset is for most people to not come back and they don’t like the idea of having funds stuck in the country, I think there needs to be a new mindset or a mind shift made around that. The tax implication is R25 000 is tax free, and after that a sliding scale applies, which can go up quite high. This is only if you’ve never made a previous withdrawal. If you’ve ever possibly made a previous withdrawal, you lose your tax-free benefit. So that’s a once-in-a-lifetime benefit you receive.
Anything after the age of 55, depending on exactly what option you choose, you can possibly qualify or R500 000 tax free. So the tax-free component is better. It’s always important to remember that, once again, if you’ve ever made a previous withdrawal or if you’ve ever been retrenched, this R500 000 will decrease. So it’s quite important to make sure that you actually have the R500 000 available before opting to withdraw it, because it could be that you’re taxed on it.
But there a sliding scale applies once again. So R500 000 will be tax free, and after that a sliding scale kicks in. So once again you can really almost pay up to a third or even more of your portfolio to tax, which is not really needed if you can structure it in a different way.
BOITUMELO NTSOKO: Now, taking the tax implications in mind, what’s the best way to move funds overseas? Is it withdrawing everything or maybe transferring to similar offshore funds?
ELKE BRINK: Unfortunately legislation doesn’t allow you to, for example, take your retirement fund you had with your company here – or your retirement annuity – and directly transfer it to an offshore pension or an offshore fund. That’s where the negative tax implication comes in. You will have to technically withdraw your funds and then move them offshore and reinvest them.
What you can do, however – and that’s where I think a lot of value lies, especially after the age of 55 when you can retire out of your products – is to start earning a monthly income. So keep the funds invested in South Africa and optimise your offshore exposure, and then you draw a monthly income; this can be paid into your offshore account.
Some of the investment platforms are already offering this service, where you can directly transfer it into your offshore account, and at least in this sense you are minimising your tax implications and the negative effect it can have on your portfolio.
You can also opt to earn your income in South Africa, depending on what your [particular] situation is. A lot of investors still keep some assets in South Africa. I don’t know – for each individual, if there’s maybe still a property or maybe still a life-cover product you’re paying [for] – all these types of commitments you might still have on this side of the world you will anyway need a South African bank account.
So you might as well earn an income here. But the options are open to both sides. You can also earn the income in your offshore account.
BOITUMELO NTSOKO: Is this the same for those who are reaching retirement age and have retirement funds in South Africa?
ELKE BRINK: I would always advise [from] a tax perspective and I think [from] a returns perspective as well – if you really go and see what the opportunities are with your investment portfolio when it comes to diversifying with asset classes – [by] managing or keeping a component of your portfolio in South Africa, you can optimise the offshore exposure.
So, even if it’s a rand-denominated investment; it doesn’t have to be seen as just a South African investment. You are benefiting from the offshore exposure. Then you are technically retired. You have this portfolio being managed on this side of the world, and you can opt to move the funds over to you either on an annual basis or on a quarterly basis or on a monthly basis, should you want to.
But I would definitely recommend getting advice on this because I do believe too many investors financially hurt themselves by immediately making more of an emotional decision through emigrating or having just a negative [view on] South Africa, economic uncertainty and political uncertainty, where sometimes [those] have nothing to do with the investment market.
Your portfolio can still be earning a fantastic return, and there’s great value to be found within the JSE like I mentioned now, with feeder funds that we can build into the portfolio and benefit from a lot of offshore exposure.
After retirement, it’s important to remember that then [the] regulation also falls away in terms of your offshore limit. [By] moving into a living annuity space at retirement, you can even increase your offshore exposure more than the 45% that you can do before retirement. So if the offshore exposure is very important to you, you can still benefit from the best of both worlds by increasing the offshore exposure substantially, but not taking the tax hit of moving your funds out of the country.
BOITUMELO NTSOKO: Just then, on the subject of offshore exposure, you mentioned optimising it. How then would you go about this?
ELKE BRINK: We do this by using feeder funds. This is a type of fund or type of portfolio that’s directly connected to offshore funds that would exist in the offshore space. The only difference is it’s still rand-nominated, so you do get all the benefits of being diversified in this offshore space. It’s just that you do it within your portfolio in South Africa. You’re not physically cashing out the funds and moving them out of the country. But within your portfolio you do have offshore exposure.
So it’s possible to build it in. There it would really depend on what your holistic portfolio looks like and what your view is of poor exposure. You are allowed to make it 100% – if you want – of the retirement [investment] should you prefer to do so. But we just do it in a rand-denominated way.
BOITUMELO NTSOKO: And if I have a living annuity, can I earn an income into my offshore bank account directly from SA?
ELKE BRINK: You can. Not all investment platforms are offering this service yet – if I can refer to it as a service. But there are quite a few. I know Allan Gray specifically is already doing it, and a few of the investment platforms are moving into that space.
But that is definitely an option and I think it’s quite a convenient option for a lot of people who don’t feel like transferring between South Africa and their offshore account.
The investment is technically South Africa-based, but your income that you earn you can opt to have paid directly into your offshore account.
There are also options normally around this [in terms of] income-earning. Do you prefer to earn one annual income? I find a lot of investors who move offshore prefer to do this, because it’s just an easy administrative concept. So once a year you earn an annual income from your living annuity and it pays directly to you. But you can also choose to earn it monthly or quarterly, depending on what your cash flow situation and your requirements look like.
BOITUMELO NTSOKO: Elke, what if I am no longer an SA resident or taxpayer? How would this then impact my financial planning in South Africa?
ELKE BRINK: I think that’s quite an important topic, and a lot of investors need to revisit their portfolios, especially before retirement – [as to] products they probably have had in place here – to see what they’re benefiting from and what not.
If you’re technically not a taxpayer here anymore, for example, I would revisit what role a retirement annuity plays in [your] life, because you’re not going to be able to claim back your contributions from Sars if you’re not really earning any income here anymore.
So revisit the purpose of every product in your portfolio. What role did [each] play before you left, and what role is [each] playing now? Once again, I’m not necessarily saying you need to cash out the investment, but your contributions going forward and your savings going forward could maybe be allocated differently.
We can also assist with starting a new investment portfolio directly in the offshore space, in this way really optimising both sides of the world for you, [thus] ensuring your South African portfolio is still being managed in an optimal way. But [it is] starting off your new portfolio directly offshore that technically has nothing to do with South Africa; you can invest your new-earned currency in a completely different space in terms of sectors you can access, the type of equities you can access, different fund managers. You can start off your new portfolio on that side.
BOITUMELO NTSOKO: If I’m in my 20s or 30s and I’ve just got a job overseas, and I’m unsure about whether I’ll stay there or move back to SA, how then should I go about my retirement planning? Should I open a retirement fund overseas and in SA as well?
ELKE BRINK: Should you move offshore – and I think this is one option I really want to give, especially to younger people – I think if you decide to go and work abroad for a few years, or even maybe with a mindset of going permanently, try to keep all your options on the table first.
I have found that a lot of South Africans want to come back one day, I think just out of a lifestyle perspective; it’s not [necessary] to take on any negative investment decisions just for you to come back maybe after a few years. So just for yourself and your own benefit keep the options open.
For a young investor, I would recommend – depending on exactly where you’re going to work – for example, in the United States they do have a similar concept to [that we have] when it comes to retirement funds. It is called a 401(k), you automatically get this benefit at work and you are starting to contribute to a retirement fund and you get tax benefits for it. So in many cases, there’s a chance that you will have a new retirement fund in the country you work in.
What I will recommend, if you’re not specifically earning a tax benefit from being in South Africa anymore, is to pause your contributions here and rather optimise the offshore space while you are there. You’re firstly earning another currency so you don’t have to convert back to rand, and you have a lot of opportunity in the direct offshore space that you don’t have in South Africa.
So, while you’re there, start building up a portfolio on that side. We can always bring it back again, should you for some reason, decide to come back to South Africa and you want your funds here. You don’t have to bring it back, but you can.
Keep the South African portfolio invested and well managed on this side as well. This way you can optimise all the returns, both locally in South Africa and abroad, wherever you are working, but you can also optimise the tax decisions you’re taking and not make a decision that will forever influence your retirement outcome by taking a tax hit that you don’t have to take.
BOITUMELO NTSOKO: Then is it just a bit easier when you’re moving your funds from overseas to South Africa, when you come back?
ELKE BRINK: It’s not a difficult process at all. I wouldn’t say it’s a problem at all. There are different types of investment vehicles we can advise in the offshore space, and they have different types of tax benefits, depending on if you, for example, only choose an accessible type of investment or we use something like an endowment structure. But normally with most of the offshore vehicles we would use, you can access [them] again in any bank account in the world, in any currency. So it’s easy to move around in the world again, if I can [put it like] that.
BOITUMELO NTSOKO: Thank you so much, Elke. That was Elke Brink, who is a wealth advisor at PSG Wealth.