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I have been hearing a lot of talk about the benefits of investing offshore.  Should I do it and if so, how do I go about investing?

Answer

 If you were living anywhere in the world, would you invest everything in South Africa?  

If the answer is no, then why should we invest everything here? 

 It makes sense to spread the risk and diversify your investments geographically. 

Offshore equity investments have done well of late.  

• If you invested R$100 000 in the S&P500 index, 5 years ago, it would be worth $171 405 today – even with the Covid collapse. 
• R100 000 invested in the JSE 5 years ago would be worth R97 619

 There are several ways of investing offshore – some are easy and others are complicated. 

The simplest way is to invest in the top shares on the JSE.  You will get a lot of offshore exposure by default as 62% of their earnings come from offshore

A more focused option is to buy tracker funds on local investment platforms using Rands.  These track specific offshore indices like the world equity index or the emerging market index.  There is even a new one that tracks a Chinese index. (The indications are that China will be one of the few markets that will show a growth in GDP this year and they are expected to do better than the UK or USA over the next couple of years.) 

Moving up a level, there are structured products that give you offshore exposure while protecting your capital.  These have been very popular of late as many investors are concerned about market volatility and don’t want to risk their capital. These products typically require you to stay invested for 5 years.  They use sophisticated financial instruments to guarantee that you will not lose any capital while at the same time participating in the growth of a particular offshore index. Most of these require a minimum investment of R100 000. 

With the two investment types above, no money has been converted into a foreign currency, so the growth is purely a function of the growth in the underlying offshore funds.  There is no currency appreciation or depreciation coming through.  To put this into perspective is you converted your Rands into dollars at the beginning of the year, they would have grown in value by 15% by the middle of September. 

So how do we go about accessing this opportunity to make money on the depreciation of the rand? 

Each taxpayer can move R1m offshore every year.  The paperwork can be daunting when you encounter it for the first time but it is a relatively easy process and your financial adviser would be able to facilitate this.   

You can also move an additional R10m offshore, but this does take longer as you have to apply for special clearance. 

Once your money is in a foreign currency, you would be able to invest in in the vehicle of your choice like 

• Offshore bank account
• Investment plan
• Endowment policy

 Offshore bank accounts have been the default investment for many who moved their money offshore in the past.  The downside is that the banks do not pay a much interest, so the main growth has been the weakening rand.  These investors missed out on the great run that the offshore stock markets delivered over the past couple of years. 

Many South African financial services companies own offshore companies, domiciled in tax friendly areas like Bermuda or Guernsey.  They have developed several products which offer South African investors easy access to offshore markets.  These come in two broad types.  Those that offer a just a vehicle to invest in offshore funds and those where the investment is structured through an endowment policy.  Each has its advantages. 

The offshore investment plan is a simple vehicle for investors to invest in a range of offshore investment vehicles.  These are essentially the offshore equivalent of local discretionary investment plans.  

• The investment is made in dollars, pounds or euros using money that has been transferred offshore to invest. 
•  This money need never be brought back to South Africa. 
• There is no term to the investment and the funds are easily accessible.  

This is a great vehicle for South Africans who are living overseas and want to get a better return on their savings than leaving it in a bank.   

The offshore endowment plan is a great way for South Africans to create an offshore nest egg. 

•  As it is an endowment policy, tax is paid within the policy at a rate which makes it attractive to high earners.  
• You can nominate additional beneficiaries of ownership which ensures longevity of the investment and avoid executor fees. The structure helps you avoid the risk of having to pay the often-punitive offshore death duties. 

Offshore investing offers South Africans a great way to diversify their risk.  They must, however, use advisers that are skilled in this area.  Badly structured investments can expose one to a host of unintended consequences. 

Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialguru.co.za

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I have money in the bank that I use to provide me with an income.  

I am finding it difficult to make ends meet because of the decreases in the interest rate.  

What do you suggest I do 

Answer 

Interest rates have decreased by 3% this year.  This may not seem like a big number but when you put it in context, it has had a devastating impact on people living off their investments. 

If  you had R1 000 000 in a fixed deposit earning 7% at the beginning of the year, you would have received R70 000 in interest.  At the moment, you would get 4% interest on a fixed deposit so you would receive R40 000 a year.  This is little over half of what they were receiving at the start of the year. 

Living off a bank deposit is not always the best way to provide a pension for yourself.  Bank deposits do not beat inflation over the longer term.  This is important as we are living longer and if our capital is not invested correctly, we can end up in a situation where our income cannot fully support us. 

There are two products that I recommend to my clients as alternatives to using bank deposits to provide a pension 

•  voluntary annuities
• discretionary income plans.

Voluntary annuities provide you with an income for life in exchange for a lump sum payment .  There are a number of types of annuity that you can purchase. You can choose one that gives a flat income or one which increases with inflation.  You can even choose an annuity which pays your spouse a percentage of the annuity should you die. 

Voluntary annuity rates are currently very attractive.  Last year, R1 000 000 would have bought a 65 year old woman a CPI linked annuity of R5 300 a month.   If she bought the annuity today, she would get R7 000 a month.  

In the case of a man, the annuity would be R7 700 a month because men do not live as long as women.  If no annual increase was chosen, the R1 000 000 would provide a 65 year old man with a monthly annuity of R10 300.   

When you compare this with the income you would get from a bank deposit, this income is very attractive. As the annuity is  guaranteed, you will not be exposed to interest rate fluctuations. The downside is that all the capital would be used to purchase this annuity. There will be no cash for the heirs to inherit 

Voluntary annuities are also tax efficient.  Most of the monthly annuity payment is deemed to be a repayment of capital.  In the example above, only R4 200 of the R10 300 would be taxable.  On the other hand, the interest income from the bank would be taxable. 

An alternative to voluntary annuities is a discretionary income plan.  Here the individual would invest a lump sum and draw a monthly amount every month.  The ideal situation is to have the investment growing by more than the drawdown.   The challenge here is to structure the investment properly to ensure that this happens. The mistake that many make is that they put all the funds in a conservative portfolio. While this will protect the capital and provide an income, the lack of growth elements could create problems in the future 

The ideal investment is one that protects  and grows the capital over time and allows one to draw a regular income.  To enable this, I split these investments into three pots.  An amount to cover a year’s worth of income would go into a money market account.  I would then put a portion into a low equity portfolio and the balance into a higher equity portfolio.  Every year we would rebalance these portfolios to ensure there is enough in the money market fund to provide an income 

The advantage with this structure is that the investment will provide long term growth as well as an income. This structure is also tax efficient with much of the income coming from capital drawdowns as opposed to interest income which is taxable. 

Banks provide capital security but are not great for providing inflation beating returns or a tax efficient income.  If you have money in a local or offshore bank, it is important that you understand what you are wanting to achieve with it. It is usually better to speak to a specialist who can put you in a purpose built vehicle to help you get the outcome you want. 

Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialguru.co.za

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 I am 42 years old, earn R40 000 a month and have not saved anything for retirement.  

How much do I need to retire on and what should I do about it? 

Answer 

The amount of money you need to retire on depends on how much you intend spending in a typical month when you are no longer working. 

A simple way to do this is to look at your monthly budget (and if you don’t have one and need a template, drop me a line and I will forward one to you).  

Mark all the things in this budget that you will not need when you retire.  These will typically include your bond if you plan to pay off your home loan by the time you retire and school fees if you do not have a “laatlammetjie”. 

Go through the budget and mark the items that would reduce.  Then identify those which would increase like medical costs.  This exercise should give you good indication of how much you will need to live on each month. 

For example, if you go through this exercise and you determine that you will need R20 000 a month to live on when you retire.  This will translate to an amount or R240 000 a year.  To generate R240 000 a year, you will need an investment of R6 000 000 assuming a 4% drawdown. 

A nice rule of thumb to give you an indication of how much you will need to generate a monthly oncome is to multiply the desired monthly income by 300.  In this example, you take R20 000 x 300 = R6 000 000 

Remember each person’s circumstances are different.  Most financial planners have sophisticated financial planning software that will work out what you need and model the best way to meet that.  I would recommend that you talk to one. 

The government has a great incentive scheme to encourage you to save for your retirement.  They will allow you to contribute 27.5% of your income to retirement savings and reduce your taxable income by this amount up to a maximum of R350 000. 

Someone earning R40 000 a month will be allowed to contribute up to R11 000 a month to a retirement annuity (or provident fund or pension fund) and have this full amount deducted from their taxable income.  This means that the R11 000 investment effectively costs you R7 040 once you take the tax saving into account. 

 If you flip this calculation around, a R7 040 investment buys you R11 000 in a retirement annuity.  This equates to a 56% return.  It makes sense to get the receiver of revenue to help you save for retirement. 

Another attractive feature of retirement annuities is that the growth within the fund is tax free.  There is no capital gains tax or tax on interest payable. This further enhances your returns. 

There are restrictions that you must bear in mind when investing in a retirement annuity. The overall investment portfolio cannot have more than 30% offshore, 25% in listed property and 75% in equities.  You will not be allowed to access your retirement annuity savings before you turn 55.  When you do, you will have to use at least two thirds to buy a monthly pension.  

The immediate tax relief and the tax-free growth make retirement annuities a powerful financial planning instrument for people of all ages. 

Young people benefit from the tax-free growth and the compounding effects of the investment.  I have an example where a 25-year-old contributed R1 000 a month to a retirement annuity for 10 years and stopped at the age of 35.  When she retired at the age of 65, she had more money than her twin sister who started contributing R1 000 a month at 35 and continued contributing for 30 years till the age of 65.  Compound interest and tax-free growth is a powerful combination. 

If you are over 55, the age restriction for accessing the funds is not a factor.  I ensure that all my clients make use of the full 27.5% allowance if their cashflow allows it. At the end of each tax year I do the calculation to see what can be contributed as a lump sum to make up the 27.5%. 

A R100 000 investment for someone at the top 45% tax bracket will effectively cost R55 000 after tax.  In other words, a 55-year-old can invest R 55 000 in a 1-year RA and receive a R100 000 investment that can be cashed in a year later. If the value of the fund is less than R247 500 then the full amount can be taken out as a lump-sum 

Retirement funds do not form part of one’s estate.  RAs are therefore a great mechanism to remove capital from one’s estate while at the same time keeping a measure of control over it 

Your investment in a retirement annuity will therefore get the government to subsidise your retirement savings, provide you with tax-free growth and reduce your estate duty.  This is a great way to save for your retirement. 

Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialguru.co.za

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I am 73 and live off the income from a living annuity.  Even though I have not increased my monthly income in two years, the capital value of the annuity has decreased significantly. 

 What can I do to ensure that I do not run out of money 

Answer  

This, unfortunately, is a problem that many retired people are facing at the moment.  The flat markets of the past 5 years and the impact of Covid this year has created a situation where many pensioners are living off capital rather than interest. This is dangerous and can cause massive problems in the future. 

The good news is there are a number of things you can do – butt first some background on living annuities 

Living annuities provide a simple way for pensioners to live off their retirement income.  You invest your retirement savings  and as long as you live on less than what the investment makes, you will have an increasing pension and a nice inheritance for your heirs.

Investors in living annuities face three big risks 

• Investment risk – will their investment portfolios deliver high enough returns to cover their living expenses?
• Inflation risk – will their income keep up with inflation? 
• Longevity risk – will you eventually run out of money?

 If it is well constructed and you do not draw more than the recommended sustainable drawdown percentage, living annuities work well.  The table below gives an indication of a sustainable drawdown 

However, life happens and pensioners often need a bigger income than the recommended amount.  They may take a chance on the higher income and hope the investment returns will be good enough to sustain it.  If this does not happen or there is a market correction, they end up living off more and more of their of capital each year until they run out of money.  This is known as the pension death spiral! 

There are two ways in which I help clients get out of this pension death spiral. 

The first option is to remove as much of the investment, inflation and longevity risk as possible.  This is done as follows: 

• Work out the bare minimum that you must spend each month in order to live.
• Use some of your retirement capital to buy a life annuity to pay you a monthly pension that covers these costs.  This would be paid for the rest of your life and should increase annually

 Life annuities give pensioners a much higher pension than the recommended drawdown for a living annuity.   In the case of a 73 year old, this would be more than double. 

• At the recommended drawdown, R1 million in retirement capital would give a monthly pension of R4 200. 
• On the other hand, R1million would buy a life annuity of around R9 400 per month, increasing by 5% each year. 

 Many people resist buying life annuities as they want to leave an inheritance.  If leaving an inheritance is important, there are structures available where you can get a life annuity that also pay out a capital amount equal to your original investment should you die.  

The life annuity has helped you cover your basic living costs for the rest of your life.  Inflation has also been controlled to come extent with the increasing annuity.  This higher income will have reduced the size of drawdown needed.  

If the living annuity drawdown is still too high to be sustainable level then you need to earn more from the investment portfolios.  The challenge is to get a higher level of growth out of the portfolio without exposing the client to too much risk.  These are pensioners and they cannot afford to take risks.  

A well-constructed portfolio can provide both growth and income without exposing the client to too much risk.   There are also special living annuity portfolios available which use of financial structures like hedging and smoothing to provide high levels of growth at a low level of risk.  Your financial adviser would be able to help you here. 

Using a life annuity and paying close attention to your investment portfolios can go a long way towards solving your problem and prevent you from entering the pension death spiral.

 Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialguru.co.za

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My father has just been to a friend’s funeral and wants to buy a funeral policy. 

Are they worthwhile and how do we go about choosing one? 

Answer  

If you had asked me this question a month ago I would not have felt as passionately about the value a funeral plan as I do now. I recently had a death in the family and have a fresh appreciation of  the value of a funeral policy. 

A funeral plan is there to deal with the immediate expenses that need to be covered when someone dies. The funeral is but one part of it.  There are so many other costs that need to be met which we do not immediately think of. Pets need to be fed, short term insurance needs to be paid, domestic staff that the deceased had working for them need to be retrenched and accounts need to be serviced. 

It takes a while to get to the point when executor takes over the management of the estate. Up until then there is a need for the family to ensure that the right things are done. This costs money. 

Everyone’s budgets are tight and very few people have Immediate access to the necessary funds to pay for a funeral and meet the financial costs of closing someone’s life.   It takes about a year to wind up an estate so the money that is paid our will in all likelihood only be recouped then, unless there are cash assets in the estate. 

There is a real need to have access to immediate cover to pay for these costs. A funeral plan certainly fills this gap – it covers the final expenses. 

Now that we have made the case for having one, how do we go about choosing a good funeral policy 

There are many funeral policies on the market. There are three factors to consider: 

• Ease
• How healthy you are
• Whether you have any existing life cover

 If you have a store account the chances are that you will have been offered some kind of funeral policy. What is nice about these policies is that very easy to take them out. There is usually no underwriting so even if your are unhealthy but you will be able to get cover on one of these funeral schemes. The downside here is that the rates are actually quite high.  The life insurance company will have taken into account that there will be a large number of unhealthy people in this group and would be charging higher rates. 

If you are healthy there may be better solutions. 

Life insurance companies also offer dedicated funeral policies. Depending on the amount of cover you take, there may be underwriting questions asked.  With risk cases, the healthier you are, the better the deal you can get.  Because the cover is low and these policies attract an initial policy fee, it often makes sense to add multiple lives like your spouse, children and even parents to these policies. 

If you already have a life insurance policy, check to see if your policy has got a built in immediate expenses benefit. The immediate expenses benefit typically pays out 10% of the cover (within limits ) within 48 hours. This is a wonderful way of meeting the immediate needs that are caused by someone’s death. The cover here would also be very cheap as you would be paying the rate that you are paying on your life insurance company policy. 

Some companies do not offer this benefit as a matter of course and you would have to ask for it as an additional benefit. 

To get a sense of what the difference in price would be – I had a client in who was paying R350 a month to a general funeral scheme for cover for himself, his wife and two children.  By moving to a life assurance company his premium dropped to R240. As he was healthy and had an existing policy I was able to offer the same cover, with underwriting for R52.  It really does pay to shop around. 

So to summarize, if your father is healthy he can get a very good deal by going to a life insurance company and getting a dedicated funeral plan where there will be underwriting.  If he is not healthy then it would make sense for him opt for a lower cover, non-underwritten product or to join a funeral scheme that is part of a larger group. The rates here would be a bit high but at least he will be getting cover. If your father has existing life insurance then I would strongly recommend that you look and see if an immediate expenses benefit can be added to that policy. 

Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialguru.co.za

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