Living Annuities And The Impact Of Offshore Investments

In the shifting political landscape of South Africa, more and more retirees are looking to invest offshore to diversify away from country and currency-specific risks, and to protect their retirement savings from potential political and market-related problems. 

A living annuity is a retirement savings investment product that allows you to receive a regular income during retirement while keeping your initial capital invested across various asset classes. Living annuities can offer significant flexibility, allowing you to choose how much income you want to withdraw annually (within regulated limits – between 2.5% and 17.5% as stipulated by Regulation 28 of the Pension Funds Act), and how your funds are invested. 

One of the notable features of living annuities is the ability to invest in various asset classes, including those that are based in markets outside of South Africa (offshore investments), and they are not subject to the same restrictions as other retirement funds (a retirement annuity for example, has a 45% offshore investment limit). Living annuities are exempt from these restrictions as set out by Regulation 28 of the Pension Funds Act, which puts a cap on how much of a retirement fund can be invested abroad. With 10X, your living annuity offers the flexibility to invest up to 100% offshore if you so choose. 

Many South African retirees are wary of the country’s political instability eroding the value of the Rand and therefore their hard-earned savings, and this has prompted many to seek alternative methods to protect their retirement savings and boost their capital. Offshore investments can  mitigate country-specific risks – by allowing exposure to global markets, sectors, and currencies, offering diversification and protection against local economic downturns. 

This is particularly significant for retirees who rely on their living annuities for long-term income stability, as global diversification can help reduce the impact of local market volatility and enhance potential returns​. Even those who don’t immediately need retirement income or have alternative income sources, might decide the transition from a preservation fund or retirement annuity to a living annuity rather than a life (guaranteed) annuity is a good idea, because of this access to international markets and its ability to potentially grow their capital. Furthermore, capital in a living annuity can be bequeathed to nominated beneficiaries (which is not the case for the majority of life annuities), and therefore present an excellent option for preserving generational wealth. 

To make informed decisions when deciding whether or not to invest offshore, it’s important to carefully weigh the benefits and risks that come with it. Moreover, if you are a retiree with a living annuity or you are nearing retirement and are considering purchasing a living annuity with the goal of investing offshore, it's equally as important to assess how much of your investment should be allocated to offshore markets. In this article we’ll be exploring these topics and offering some valuable insight for retirees looking into offshore investing. 

Offshore Investments And Living Annuities

Living annuities are retirement savings investment products that offer flexibility in how you choose and manage your investments as well as your withdrawal amounts. The income you get from a living annuity during your retirement is generated through scheduled withdrawals, ideally at a level that ensures that your original capital is preserved (i.e. you are only using the return on your investment to pay yourself, your investment fees and balance the impact of inflation). 

We call this idea the Golden Equation, and it stipulates that withdrawals, inflation, and fees combined should not exceed the returns generated by the investments. This strategy ensures that your original capital remains untouched so that you don’t run the risk of running out of money in retirement. 

Asset allocation within an investment fund refers to how much money is invested in each asset class. This allocation determines the balance between assets with the potential for growth (which generally come with the associated risk of higher volatility, such as equities and property) and more stable assets like bonds and cash. For example, if your aim is to grow your wealth while managing market volatility, the 10X Your Future Fund adopts a well-balanced asset allocation strategy that aligns with long-term capital growth objectives. For indicative purposes, the fund allocates a significant portion to growth assets like equities (around 60-75%), which often deliver higher returns over time but come with greater volatility. This equity exposure is split between local and international markets to enhance diversification.

To mitigate risks associated with these growth assets, the fund allocates 15-25% to bonds, which provide stability and reduce volatility, acting as a defensive buffer. 5-10% is invested in property, which adds a layer of diversification while offering the potential for both income and growth. Lastly, a small allocation of 5% or less to cash is maintained for liquidity and defensive purposes. 

Unlike a life (guaranteed) annuity, a living annuity allows you to tailor your asset allocation to fit your financial objectives and risk tolerance. Diversified asset allocation strategies distribute investments across multiple asset classes and geographic regions to help minimise risk. For instance, 10X Investments offers a range of living annuity investment funds, each with a distinct asset allocation designed to suit varying risk levels and investment time frames. 

More From 10X Investments: We also offer a few handy online tools like our EAC calculator to find out if you could do better with 10X, along with our Living Annuities calculator to get a general idea of what you need to contribute to reach your retirement goals. You can also see how we stack up against other providers with a free cost comparison report. 

Offshore investments refer to investments made in foreign markets outside of South Africa. Unlike local investments, offshore investments provide exposure to global economies, industries, and currencies. In the context of living annuities, this can offer significant diversification opportunities. However, while having offshore exposure in your living annuity can offer significant benefits, it's essential to consider the associated risks and balance them with your personal financial situation. We’ll dive deeper into the risks associated with offshore investing further down. 

Living Annuities And The Appeal Of Offshore Investing

Many South African retirees are increasingly leaning towards offshore investments to provide a hedge against the local economy. A significant reason is the weakening Rand and South Africa’s uncertain economic prospects. Offshore investments are seen as a means to protect retirement income from depreciating currency and potential political instability. 

Moreover, offshore investments allow retirees to diversify their portfolios across global markets, reducing concentration risk. Concentration risk occurs when a portfolio is heavily invested in a limited number of assets, which in turn increases vulnerability to negative performance from any single investment. For example, if a large portion of your portfolio is tied to one sector, any downturn in that area can disproportionately affect your entire investment. Investing offshore can help mitigate concentration risk by diversifying your portfolio across various global markets and asset classes. 

By spreading investments geographically, you reduce reliance on the performance of any one market. Offshore investments also provide exposure to industries or sectors that may not be as prominent in the South African economy, offering a broader range of opportunities. The broader investment universe available offshore, including tech giants like Apple and Microsoft, and household names like Coca-Cola and Johnson & Johnson, potentially offers greater growth opportunities than the JSE alone can provide. This is partially why global diversification is becoming a key strategy for retirees wanting to balance their portfolios and minimise local risks. 

What Is The JSE? The JSE, or Johannesburg Stock Exchange, is the largest stock exchange in Africa. Indirect offshore exposure can be achieved by investing in global companies that are listed on the JSE. However, these investments would still be Rand-based, which means that one has not effectively decoupled one’s investments from the local economy.

Lastly, as mentioned earlier, retirees with alternative retirement income sources (who are therefore able to weather more risk) may opt to move from preservation funds or retirement annuities into living annuities because they offer broader access to international markets, unlike other retirement funds, which are restricted by Regulation 28 of the Pension Funds Act. Since living annuities aren't governed by Regulation 28, retirees can invest more extensively offshore (and up to 100% offshore with 10X), providing greater investment flexibility and growth potential. 

Essentially, the shift to offshore investments can be boiled down to three main factors: Protecting retirement savings from country-specific risks, reducing concentration risk, and the prospect of more investment growth when investing offshore. 

What Are The Risks Associated With Offshore Investments?

The primary risk associated with investing offshore in your living annuity is currency volatility, as the rand tends to fluctuate significantly against major global currencies. In the words of Kelin Pottier, a Solution Strategist at 10X Investments in our recent living annuity webinar, “The Rand is one of the most volatile currencies in the world,” and although the Rand has generally weakened against major global currencies over the long term, short-term fluctuations in exchange rates can occur frequently.  

What this means, is that while a weakening Rand can boost the returns on offshore investments, the opposite can occur if the Rand strengthens. This risk is compounded by standard investment risks like market volatility, which can impact the value of both local and international investments.

10X Investments helps mitigate these risks by offering diversified portfolios that blend local and offshore assets, allowing you to balance growth potential and risk management. Our underlying funds range from moderate to high offshore exposure (up to 100%) depending on your ability to take on risk and your specific financial goals. 

Although living annuities are exempt from the constraints of Regulation 28 of the Pension Funds Act and can allocate up to 100% of investments offshore, many living annuity providers are unable to fully offer this option due to their own internal investment limits. Luckily for you, this is not an issue with 10X Investments – we offer the flexibility for investors to take full advantage of offshore exposure​.

If you’d like to leverage our retirement expertise, there are no call centres at 10X, so you can get in contact with any questions you might have and rest assured that an experienced 10X investment consultant will be available to chat with you. 

How Much Should You Invest Offshore?

In terms of how much offshore exposure is appropriate for you, there isn’t a one-size-fits-all answer – it really depends on each person’s unique circumstances and tolerance for risk. 

Brett Mackay, a 10X Investment consultant, suggested in our recent webinar that retirees in their 60s who purchase living annuities can afford to hold more aggressive portfolios and benefit from potentially higher long-term returns, given the likelihood of many years ahead in retirement. Afterall, at retirement, you may need your living annuity to last for two decades or more, making it important to maintain a long-term investment outlook when choosing a living annuity portfolio. However, as retirees age, many choose to gradually shift to lower-risk portfolios, as older clients often value more security and may become less tolerant of market volatility as they approach later stages of retirement. 

When considering offshore investments for your living annuity, it's also important to align your assets with your liabilities. This means that if a significant portion of your wealth is Rand-based in South Africa, you might want to increase your offshore exposure to balance potential risks. Keep in mind, however, that the Rand is volatile and the exchange rate can either work in your favour or work against you. If your offshore investments are performing positively and the Rand depreciates, you get stronger returns. However, this can also work in reverse, with the Rand doing well and international markets underperforming, and thus your offshore investments may not generate the capital you expected. 

Early in retirement you might be more inclined to take on risk and opt for more offshore exposure and then gradually decrease offshore exposure as the years go on - again, a fantastic benefit of living annuities is that they allow you to do this easily. As Kelin Pottier stated in our recent webinar, between 40% and 60% offshore investment offers a good range for a Rand-based investor. Alternatively, if you have other sources of retirement income, you might consider going 100% offshore, as you don’t run the risk of running out of money in retirement.

With that being said, the decision of how much to invest offshore is ultimately up to you – and thorough research, meticulous planning, and speaking to a professional can be useful in ensuring your outcome aligns with your needs. As mentioned, 10X offers a variety of underlying funds to suit different time horizons and investor’s willingness to take on risk, ranging from a conservative option with 38% offshore exposure (including indirect exposure) to a fully global portfolio invested in the MSCI World Index. 

These include three Regulation 28-compliant options: 

• 10X Defensive Fund
• 10X Moderate Fund
• 10X Your Future Fund

Additionally, there are three international-focused portfolios:

• 10X International Medium Equity Portfolio
• 10X International High Equity Portfolio
• 10X MSCI World Index Feeder Fund

Although living annuities and offshore investing come with inherent risks, the potential benefits certainly make it worth considering. With careful planning, expanding your investments globally can be an effective way to protect your retirement savings, regardless of local political uncertainties, and diversifying internationally can unlock broader investment opportunities and help you mitigate country-specific risks. 

Don’t hesitate to reach out to a 10X consultant to learn more about living annuities and offshore investing, and arm yourself with the knowledge you need to grow your savings well into retirement.