Over the last few years, the government has slowly been raising the limit on how much investors in pension funds and retirement annuities could hold offshore. At this year’s budget, this was raised from 30% to 45%.
The decision has been widely welcomed because it has some very positive implications.
While there are some great companies listed on the JSE, they are only a fraction of what is available globally. By value, our local market is about 0.5% of the world’s market capitalisation. That means that investors that had to keep 70% of their assets at home, were missing out on a lot of opportunities elsewhere.
The 45% allowance means that it is now possible for South Africans to build much more diversified portfolios. And it makes retirement annuities much more attractive, since investors aren’t as restricted in where they can put their money.
But this doesn’t necessarily mean that every investor should be changing their portfolios straight away to get their global holdings up to 45%. While there are many reasons to increase offshore exposure, it’s not as simple as saying that investing globally is always more desirable than investing in South Africa.
Recent experience bears this out. Over most of the past decade global markets have performed much better than the JSE. But more recently, South African shares have done much better. There are always cycles to markets, and nothing is ever a one-way bet.
This means that investors should consider a number of questions when thinking about their offshore allocation. And the answers they come to will differ from one person to another.
The first thing to think about is how long you are investing for. If you are planning for a retirement that is decades into the future, it may well be a good idea to use your full offshore limit. This is because, over long periods, the extra diversification can both reduce your risk and increase your potential sources of return.
What you should never forget, however, is that the rand is a currency that never sits still. Its history clearly tells us that it can experience big swings – both positively and negatively.
If you are investing for only a few years, this can have big impacts on your money. In any year, global stocks can easily go up 10%, but you still lose money in rands because the local currency has moved 20% the other way.
That is a big reason why you need to think about how much risk you can take, based on how long you are staying invested.
If you are going to move more money offshore, you also need to think about whether there will be tax implications. If you are just changing the allocations within a retirement annuity, this isn’t an issue. But if you are selling other local investments in order to get more offshore exposure, you need to calculate whether that cost is worth it.
It’s also worth bearing in mind that, right now, the general view is that South African assets – both shares and bonds – are offering good value. And they have been performing well. If you are going to put more offshore, this might not be the best time to do it. It might make more sense to stagger it over time.
A final consideration would be what you ultimately want the money for. If your plan is to emigrate or retire overseas, then it can be difficult to get your money out of a local retirement savings vehicle. Last year, the government passed a law that anyone who left the country could only withdraw their retirement savings after no longer being tax resident in South Africa for three years.
There are ongoing debates about how this will work, but that is a long time to have to wait for your money. So, even though the higher offshore limits and tax benefits inside a retirement annuity are attractive, you might not want to run this risk if your future plans are outside the country.
The most important thing to bear in mind is that everyone’s circumstances are different. How much to take offshore will therefore differ from one individual to the next. As always, it’s best to get good advice to suit your particular needs.
To discuss how you should treat the new offshore allowance, speak to a professional.
Complete Your Financial Plan
Sign Up To Our Mailing List
December 4 - Stock Markets Break Three-Month Losing StreakDecember 3 - The Differences Between Life and Living AnnuitiesDecember 2 - Should you be an Optimist or a Pessimist With Your Money?December 1 - How to Give Meaningful Gifts This Festive SeasonNovember 4 - Market Update: The Effects of War, Higher Interest Rates and China on EquitiesNovember 3 - Why do People Invest in Property?November 2 - Retirement Planning: The ins and Outs of Nominating BeneficiariesNovember 1 - Retiring Well is About More Than MoneyOctober 4 - Why Your Marital Contract Really MattersOctober 3 - How to Avoid Being Scammed by Email FraudstersOctober 2 - The Stock Market Indices to Watch When Monitoring Equity PerformanceOctober 1 - Why do Some People Have a Problem Spending Money?September 4 - The Difference Between Being Rich and Being WealthySeptember 3 - The Ins and Outs of Buying Offshore PropertySeptember 2 - A Good Budget Doesn’t Limit Spending, it Prioritises itSeptember 1 - Should you pay off your home loan?August 4 - How to Take Advantage of the Donations Tax AllowanceAugust 3 - Five Reasons why a Financial Windfall Must be Managed CarefullyAugust 2 - What’s Cooking with the Three-Pot System?August 1 - Make Sure Your Family is Financially Prepared for When You Pass AwayJuly 4 - A Must-Have for Couples who Choose not to Tie the KnotJuly 3 - Can Gratitude Make you Feel Better About Your Money?July 2 - Four Ways to Make the Most of RetirementJuly 1 - How to Invest When There’s So Much Bad NewsJune 4 - The Ins and Outs of Compulsory AnnuitiesJune 3 - Who is Influencing Your Financial Decisions?June 2 - R is for RebalancingJune 1 - Don’t let Money Ruin Your RelationshipMay 4 - Five Ways to Teach Kids About MoneyMay 3 - Much Ado About RiskMay 2 - Living Wills: A Must Have, Despite the Grey AreasMay 1 - What is True Wealth?April 4 - How the 2023 Budget Will Impact Your PocketApril 3 - Three Financial Imperatives for Women in DivorceApril 2 - Should You Ask ChatGPT for Financial Advice?April 1 - Compound Interest: The Eighth Wonder of the WorldMarch 4 - How a ‘Safe’ Fixed Deposit Might Still be RiskyMarch 3 - Thinking of moving to Australia? Bear these numbers in mindMarch 2 - Avoid These 6 Barriers to Wealth CreationMarch 1 - How Good do You Think You Are at Investing?February 4 - Is Money Stress Taking a Toll on You?February 3 - Why an Endowment is One of the Best Ways to Invest OffshoreFebruary 2 - Why too Much of a Good Thing Can be a Bad ThingFebruary 1 - Invest With FIRE and Never Look BackJanuary 4 - Why Lottery Winners End up Broke: The Importance of Your Financial ContextJanuary 3 - Discover the Freedom of a Tidy PortfolioJanuary 2 - Why You Absolutely Should be Investing in EducationJanuary 1 - Four Simple Steps to Start the Year on the Right Financial Foot
December 4 - What is This Volatility Risk People are Always Talking About?December 3 - Why You Need to Watch Out for The Butterfly EffectDecember 2 - 6 Ways to Achieve Financial FreedomDecember 1 - Three Books for the HolidaysNovember 4 - The Question of LoyaltyNovember 3 - Why do we Even Have Bull and Bear Markets?November 2 - Should I Buy a Holiday House?November 1 - Put Stocks, Rather Than Socks, Under the Tree This ChristmasOctober 4 - Can You Take Out Life Insurance on Someone Else?October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences SavingOctober 2 - Why Timing Might be Everything in Retirement – Especially in a Bear MarketOctober 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never MakeSeptember 4 - Capital Gains Tax: 10 Common Questions AnsweredSeptember 3 - The Risk That Many Investors Don’t Think AboutSeptember 2 - Much Ado About Regulation 28 and the Private InvestorSeptember 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?August 4 - Retirement Planning for Age-Gap CouplesAugust 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)August 2 - Does Your Family Need a Constitution?August 1 - Women’s Month: Three Ways You Can Improve Your Money HealthJuly 4 - Five Things to Check When a Loved One Passes AwayJuly 3 - Rules of Financial Planning For a Special-Needs ChildJuly 2 - Why Your Financial Plan Should Cater For Possible DementiaJuly 1 - Why Inflation is the Most Important Investment BenchmarkJune 4 - How Relevant Is The 4% Rule of Thumb These Days?June 3 - Why You Should Treat Your Finances Like Your HealthJune 2 - Is Your Business Good Retirement Capital?June 1 - With the Limits Raised, How Much Should You Invest Offshore?May 5 - Quote of the Month: Challenging the Rejection of an Insurance ClaimMay 4 - Financial Products: The Less You Understand, the More You PayMay 3 - The Miracle of Investment Debit OrdersMay 2 - Five Things to Think About as Interest Rates RiseMay 1 - Stay Calm When the Bear ProwlsApril 5 - Quotes of the Month – The War in UkraineApril 4 - Smart Ways to Give: During and After Your LifetimeApril 3 - Take These Three Steps to Break the Money Shame SpiralApril 2 - When Things Don’t Go According To (The Financial) PlanApril 1 - What Amazon and Ford Can Tell Us About DiversificationMarch 4 - Quotes of the month – What the NFT?March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”March 2 - The Different Ways to Invest: What Does It All Mean?March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About MoneyFebruary 6 - Quote of the Month – Don’t Cash In Your Retirement SavingsFebruary 5 - Should You Top Up Your Retirement Annuities Now?February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 2 - Three Reasons an Insurer Could Cancel Your PolicyFebruary 1 - Investing: Men and Women See Things DifferentlyJanuary 4 - Quote of the month – Stay invested!January 3 - What SARS Says About Crypto Assets and TaxJanuary 2 - Three Ways to Leave a Legacy, And Not Just an EstateJanuary 1 - Red-Carding the Myth of The Rational Investor