Ricochet News

Sable Offshore Living Annuity frees up captured retirement pots

Jul 23, 2018
Sable Offshore Living Annuity frees up captured retirement pots

 Many South Africans living overseas have their retirement annuities tied up in SA pension funds, with little or no offshore investment and ultimately with their pension paid out locally in Rand. In response to this predicament, Sable International, together with their preferred investment partners, has launched an Offshore Living Annuity, which is essentially a South African living annuity product completely invested in offshore funds. Mike Abbott - Director of Wealth, Sable International discusses how the need for the product arose.

Currently in South Africa, once a retirement annuity or pension fund is transferred into a living annuity, it can’t leave the country as a lumpsum – there is no mechanism to transfer a living annuity abroad other than when it has reduced to a prescribed amount (usually R50,000).  Clients who have already left South Africa and who are living in a different currency zone and economic environment are not keen to have a previously saved pension pot remaining in South Africa.

Sable has developed a solution for our wealth clients that invests 100% of the Living Annuity offshore using the asset swap mechanism and  using globally diversified offshore funds.

Surprisingly, there is currently no other product like this freely available in South Africa - no doubt because the large providers have limitations on their asset swap capabilities and generally use this capacity for corporate clients and high net worth individuals. A mass market offering for this kind of product is not something that would work for the institutions.

We built this solution because we were unable to find one that ticked all the required boxes. Most people are not aware that when funds move from a retirement annuity or a pension (Covered by the Pensions Fund Act and pension regulations) into the living annuity such funds are not constrained by Regulation 28 which prescribes certain asset allocation levels). While your pension funds in South Africa are accumulating, they are bound by this investment restriction, which means only 30% of the fund can be invested offshore.

Once it goes into the living annuity environment, you actually start to draw and you’ve “retired” the pot as such, and no longer bound by Regulation 28. At that point you can invest 100% offshore. You just need a mechanism to do so.

You need a provider that’s going to give you proper investment solution built for offshore funds, built for hopefully the entire investment universe outside of South Africa and you need the asset swap mechanism to be able to do this. Importantly, it needs to be cost effective.

Offshore Living Annuity and taxation

The double tax treaties around the world usually operate on the same principle. The OECD model double tax treaties usually allow the tax to fall on the individual wherever they are resident, so they end up paying tax on their pension where they live, be that UK, Australia, wherever.

Expats can obtain a tax directive from SARS to indicate to the living annuity provider that they are non-resident and therefore can receive the full gross amount and allow the tax to be calculated in the country where they are resident. Alternatively, they can suffer the tax in SA and claim a tax credit in the country of residence. It is important to note the provisions of the specific treaty as there are a number of exceptions to the general rule.

Offshore Living Annuity and global investment

The investment models are globally diversified. On average there are approximately 14 000 global securities and instruments in the portfolios.  We, in conjunction with our investment managers, have developed a number of different portfolio ranges to suit a broad range of clients resident abroad.

Minimum portfolio size for the Offshore Living Annuity

Realistically the product probably requires a minimum of about R1,000 000 for us to be involved and facilitate this. The total running costs of the product usually comes in at a range from around  1.9% to 2.1% per annum, depending on the size of the portfolio. In the UK, we’re used to investment solutions for clients coming in somewhere between 1% and 1.5%, so, whilst these percentages feel high to us, it typically still comes in lower than the client’s existing SA-centric solutions, including all the fee layers, being administration, asset swop, advice and fund management fees.

An important thing to remember is that, although the product is invested 100% in an offshore set of funds, in order to draw income , that income has to be disinvested from those funds, returned to the South African provider, paid in South Africa to a South African bank account and then sent back out of the country. Foreign exchange risks on that transfer of the money remains, but is mitigated, and the money is not invested in the South African stock market and not limited in its offshore exposure.

There is still a risk if the South African government were to revise exchange controls and require asset swaps to be switched out and all the money returned to South Africa -  that risk doesn’t go away and there isn’t a way to remove that risk. We think it’s an improvement for anyone with substantial assets in their living annuity, and wants full offshore exposure with their living annuity. It’s a whole lot better than just having a completely captured living annuity In South Africa.

Ideal client for the Offshore Living Annuity

This product typically suits a 55-60 year old plus former South African resident. These are clients who are considering the option of cashing in and taking their pension out of South Africa (through the Financial Emigration process) or retiring into the living annuity structure. At that point I think it’s very important to consider the various tax options.

There are also a range of clients that are already in living annuities, and not aware of broadened offshore investment options. Generally, they are invested in local funds that have offshore exposure within them, which is a very rudimentary and expensive way of obtaining offshore exposure.

We prefer to do it directly in the offshore funds. This can be a significant portion of a client’s  wealth, which effectively is captured in a country that they’ve chosen not to live in. For that market, the Sable Offshore Living Annuity is a key solution .

Criteria for the Offshore Living Annuity  

Key criteria are living abroad and having a South African living annuity, or being close to retirement age and looking at options to access those funds. Proper, regulated advice should be obtained to ensure the best outcome, taking into account both countries’ pension legislation and tax treaties.

Does age affect the Offshore Living Annuity?

Expat South Africans living abroad have a decision to make at retirement age. Do I emigrate and cash in the pot and pay tax at withdrawal rates or do I retire the pension into the living annuity and invest it offshore? That’s an important decision because it’s irreversible. We can provide advice around that key decision as we offer both the offshore living annuity and the financial emigration service which includes the withdrawal of the pensions, the tax clearance work and the foreign exchange to transfer the funds offshore.

The Offshore Living Annuity process

The initial process is having a conversation with us to assess whether the Offshore Living Annuity is suitable with all options considered. We start our client interactions with a discovery meeting where we explore their circumstances, objectives and risk profiles, from where we can advise on the most appropriate solution.  We’re independent financial advisors; licenced in the UK and South Africa. We are also expanding our services into Europe through the EEA passporting authorizations. We provide  holistic advice using a very broad toolkit drawing on our various areas of expertise. We don’t have a preference for any one option over another, we charge the same fees no matter which product set we’re using. Our sole objective is to use our skill set to help clients make smart financial decisions.