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INDIVIDUAL CONSULTING

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Thought leadership content from Alexander Forbes to help you make better savings and investment decisions.

ALEXANDER FORBES

Contents The benefits of offshore investing 1

The importance of remaining invested 4 New 3-year non-residency test 10

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Offshore investing The benefits of offshore investing

The effect of currency movements

invested offshore through these retirement savings vehicles, with a maximum of 30% exposure allowed outside of Africa, and a further 10% allowed in Africa outside of South Africa.

Many of you will watch your investment values and will be concerned when you hear about negative market movements, and when you hear that the Rand (ZAR) is depreciating. However, although ZAR depreciation is not good for South Africa as a part of the global economy, and is certainly not good for importers and the cost of imported goods, it can have positive impacts on portions of your overall investments. In particular, any assets you have invested offshore increase in value when the ZAR depreciates, and any assets you have invested in local equities that are “ZAR hedges” (equities with earnings driven by offshore factors) will also go up in value.

You can also invest offshore through taking money directly offshore through South African Reserve Bank limits of R1 million per year in a single discretionary allowance without the requirement to obtain a SARS tax compliance certificate, and R10 million per year with a SARS tax compliance certificate.

Alternatively, you could invest through local investments that give you offshore exposure such as unit trust feeder funds that invest into International currency investments.

You should also consider that a large portion of your South African equity exposures across your retirement fund and local discretionary investments will be invested in what are called “ZAR hedge” stocks. These are stocks such as Naspers, Prosus and British American Tobacco, whose returns are driven largely by non-South African factors. Approximate 60% of earning of companies listed on the JSE are driven by non-South African factors, and thus already give you substantial “offshore” exposure to your investments.

Your current offshore exposures As a South African investor, you potentially already have a large allocation to offshore investments through your retirement savings, whether through an employer pension or provident fund, or your own personal retirement annuity or a preservation fund. Regulation 28 of the Pension Funds Act regulates the maximum that can be

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Why invest offshore?

An offshore investment is usually seen as offering a diversification benefit versus your local investments, both in terms of the ZAR depreciation return earned on non-ZAR investments, as well as the access to a much broader range of underlying investments internationally. For example, investing into local JSE-listed investments gives you the opportunity to invest into Naspers and Prosus that give “ZAR hedge returns”, significantly driven by the underlying investment into Tencent, a Chinese technology company.

However, investment offshore (for example through a global technology fund) would give you access to a wide range of other technology stocks, giving you diversity in exposure.

What proportion of your assets should you invest offshore?

This is a decision that is very much based on your individual circumstances and one where you should get advice from your financial adviser.

Planning to retire outside of South Africa?

Planning to retire in South Africa?

A large portion of your assets should be invested in South Africa when you retire, both to match your South African liabilities as well as to give you access to liquid assets to fund your living expenses.

You may want to build up a larger proportion of your assets outside of South Africa.

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When should you invest offshore?

least USD for their ZAR. The green arrows illustrate the subsequent recovery that occurred in the ZAR. Waiting for the ZAR to “normalise” would result in an investment offshore with more USD for the ZAR than if the offshore investment was made when the ZAR was weak.

Your investment offshore should be made in line with your long-term investment plan. It’s very dangerous to try to time this investment, especially since most of us will be very nervous after the ZAR has depreciated substantially. This could be the worse time to take money offshore as you will get less USD for your investment than if you wait for the ZAR to recover (as it often does) before you make the investment.

The brown line illustrates a concept of “rand cost averaging.

If you take small amounts on a regular basis then some will be invested when the ZAR is weak, and some when the ZAR is strong. This avoids taking a lot of money offshore when the ZAR is weak, but still allows you to take advantage of ongoing depreciation of the ZAR that has occurred over time.

The graph below illustrates this. The red arrows illustrate periods when there was significant ZAR depreciation that could have resulted in people taking money offshore just when the ZAR was weakest, and they would get the

Conclusion Most of us will want to have a portion of our assets invested offshore in order to give protection against expected ZAR depreciation over time. However, the amount we want to invest offshore should take account of the offshore exposures we already have, the proportion we should hold based on our individual circumstances, and the right vehicle to use for offshore investment. It is critical that you get input from your financial adviser before making any decision in respect of investing offshore.

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The importance of remaining invested

Finances in jeopardy — fight, flight or freeze?

Change is a part of life, whether it is personal changes, lifestyle changes, or financial changes. Sometimes the change brought on by fear and pressure, leads us to making impulsive and harmful decisions.

As with any typical journey where we may experience both smooth and bumpy periods, our investment journey is no different. Throughout 2020, we were confronted with heightened volatility and therefore, we continuously reminded our clients of the importance of keeping focus on the bigger picture, a picture that can easily be overshadowed by short-term noise and volatility.

Our finances are personal to us and might easily warrant knee-jerk reactions if we feel like they are being threatened – reactions that might be detrimental to us in the long term.

The bigger picture is big for a reason. It serves to remind us how easily we can make impulsive decisions when we are under pressure. It demonstrates how, in most cases, we would have been better off not being reactive and rather considering if the decision we intend on making is aligned with what we aim to achieve.

Our instinct to protect or preserve serves to strengthen these tendencies. Making a quick decision that we feel will help preserve or protect our investments is the most natural reaction, but is it always the correct one?

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Stay invested when it matters To illustrate this, let us consider an investor who had committed R100 towards South African shares at the beginning of last year (1 January 2020). Prior to 2020, South African shares showed strong performance, returning 12.1% in 2019, increasing their appeal as a good investment opportunity. Having seen this, it would have been natural to expect this strong performance to continue well into 2020.

How R100 invested in SA shares and cash on 1 January 2020 would have grown to 31 March 2021 Equity R121 Cash R106

Source: Alexander Forbes Investments

By March 2020, both local and global markets were hit with a barrage of market volatility and uncertainty.

Valuations were revised and ultimately, shares performed poorly. At this point, with most markets down, uncertainty at an all-time high, and your investments appearing to be steadily declining, everything seems to strengthen the case to become defensive – right?

Defensive investments – such as cash – help to protect your money but are not ideal for growing it. So, while having exposure to cash would have provided adequate protection in the short term, it would have ultimately compromised your ability to achieve your long-term objectives - particularly for investors focused on better retirement outcomes.

GROWTH ASSETS Shares and property

OBJECTIVE

OBJECTIVE

Achieving an investment return (including capital growth and income) that outperforms inflation.

Achieving more stable returns than growth assets.

DEFENSIVE ASSETS Cash and bonds

Simply put, investors who sought safe haven in cash would have been worse off than those investors who remained invested in shares throughout 2020, even with the sharp market falls experienced earlier in that year.

The year 2020 has proven all the rules of investing that we believe in: Stay committed to long-term goals - The markets can be a scary place at times, but long-term investors shouldn’t panic.

What goes down, will go up - historical evidence reminds us that the gains experienced over the long term outweigh the losses experienced in the short term.

It is nearly impossible to time the market - changing an investment strategy designed with the long term in mind because of short-term volatility often ends in missed opportunities or even losses.

Make sure your investments are diversified - a complementary mix of growth and defensive assets can help investments absorb market or economic shocks but also participate in markets when they recover.

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Sometimes not taking action is the best reaction In stressed situations, we may always be inclined to react impulsively instead of bearing any prolonged distress. The same is true in investing, with the sharp market falls and heightened volatility we experienced at the beginning of 2020 being a case in point.

Which of these options would have been best in 2020?

Option 1 or 2 would have been best, depending on your investment requirements for shorter or longer term investments.

Option 4 is what everyone thinks they can get right but even the most astute investor very rarely knows when to get out of the market and when to get back. Option 3 is where the most value is lost. Don’t time the market – stay in the market.

1 Invest in cash over the year.

3

2 Invest fully in shares over the year.

Invest in shares at the beginning of the year but switch to cash during the crisis (at the end of February 2020) and do not invest back into shares.

4 Invest in shares at the start of the year, switching to cash during the crash (at the end of February 2020), then investing back into shares during the recovery (end of April 2020).

These illustrations highlight the importance of staying invested and not trying to time the market, especially in times of uncertainty. If you disinvested from a growth portfolio during the crash and were unable to go back into the portfolio you were previously invested in, you would not have participated in the recovery and would have lost all the growth retrieved during this period. Trying to time the market is always a tricky exercise and it has been shown that time in the market is more important than timing the market.

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New 3-year non-residency test for members exiting retirement annuity and preservation funds

By Jenny Gordon, Head: Technical Advice Investments, Product and Enablement at Alexander Forbes

The emigration test for retirement annuity and preservation funds will be replaced with a 3-year non-residency test – effective 1 March 2021. Here’s what you need to know…

Following the decision by the SARB to phase out emigration for exchange control purposes, amendments to the Income Tax Act will allow members of retirement annuity and preservation funds a full cash withdrawal from the fund, when the member is non-resident for an uninterrupted period of three years, and in respect of emigration applications received before the above date and approved within one year.

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Who is affected by the ‘emigration/3-year’ rule?

Members of retirement annuity funds (RAF)

Members of preservation funds

YES

(Only relevant where the member has already exercised the right of one withdrawal and must await retirement date after age 55).

YES

X

Members of provident preservation funds

Members of pension funds

YES

NO

(Applicable under age 55, where the member has already taken the one withdrawal.

In a provident preservation fund, after age 55, the full amount can be taken in cash on retirement.)

Deferred members

Where the member has retired from employment and is a deferred member of a pension fund, that member will have to transfer to a RAF or preservation fund and exercise the ‘emigration/3-year rule’ from there.

It is important to note that the law has not changed at all in relation to temporary residents, who may withdraw when their visa expires and they have left the country.

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The law – after 1 March 2021 (Taxation Laws Amendment Bill signed into law on 20 January 2021) The new ‘emigration/3-year rule’ means that, after 1 March 2021, a member may only withdraw the full amount of the retirement fund as a cash withdrawal benefit if the member is a non-resident for an uninterrupted period of three years or longer.

Limited retention of emigration status Although the concept of emigration is being phased out, a limited acknowledgement of emigration status will be retained in two ways:-

If a member is or was a resident and that person has officially emigrated from South Africa.

If an application for official emigration was received by the SARB on or before 28 February 2021, and it is approved before 28 February 2022.

Phasing out of Emigration There are many questions surrounding the proposed changes to the concept of emigration generally, which have a bearing on other aspects of financial planning. For example, we need to understand how it will affect inheritances and beneficiary nominations to non-residents who were previously SA residents. The current rule is that an inheritance and beneficiary nomination can be paid to an emigrant outside the country, but not to a former permanent resident of SA who has not emigrated. The person will have to be paid in SA. Industry bodies have requested clarity on these issues and we will update you when we have greater clarity.

Disclaimer: Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under discussion and as such does not constitute advice. While Alexander Forbes has taken reasonable effort to ensure that the information contained herein is true and correct it will not be held liable in respect of any loss arising from any advice provided arising out of the contents of this circular. We suggest that you contact your Legal department before taking any decisions based on the information herein.

The following businesses are licensed financial services providers: Alexander Forbes Financial Planning Consultants (Pty) Ltd (FSP 31753 and registration number 1995/012764/07) Alexander Forbes Investments Limited (FSP711 and registration number 1997/000595/06) Credits: Alexander Forbes Communications (production) | Getty Images (imagery) 21056-NL-2021-04