How Much Offshore Exposure am I allowed in my Living Annuity versus my RA or Pension Fund?

How Much Offshore Exposure am I allowed in my Living Annuity versus my RA or Pension Fund?

Offshore markets are currently giving good investment returns, I have been asked this question a few times lately.

RA’s and Pension Funds are used to build up retirement assets during your working life. A Living Annuity is one of several options post-retirement used when needing a regular income.     

Living Annuities Fall Under the Long-Term Insurance Act and RA’s, Pensions, Provident Funds and Preservation Funds Fall under the Pensions Funds Act

Retirement Annuities (RA’s), Preservation, Pension and Provident Funds, fall under the Pension Funds Act.  

Living Annuities (also called a Linked Retirement Income Portfolio), fall under the Long-Term Insurance Act.

The main differences in the limitations of how much you can invest offshore in these investment vehicles are due to these two sets of legislation.

Asset Limits Under The Pension Funds Act

Regulation 28 of the Pension Fund Act covers RA’s, Preservation, Pension and Provident Funds, while Living Annuities strictly speaking fall under the different legislation of the Long-Term Insurance Act.

Regulation 28 of the Pension Funds Act limits the assets into which members of a registered retirement fund may invest and is designed to protect investors against poorly diversified investment portfolios. To support taxpayers receiving the good tax deductions that I shared last week, the regulation aims to see investors invest their hard-earned money in a sensible way, without excessive exposure to risky assets.

While proponents of Regulation 28 believe that this piece of legislation is effective in doing so, over the past few years we have seen the relaxation of certain limits to give greater flexibility to investors.

These limits today are:

• A maximum of 75% exposure to equity (shares)

• A maximum of 45% exposure to international investments

• A maximum of 25% exposure to property

• A maximum of 10% exposure to African investments (this is included in the 45% exposure to international investments, not over and above)

• A maximum of 15% exposure to private equity

• A maximum of 10% exposure to commodities

• A maximum of 10% exposure to hedge funds (2,5% per hedge fund)

• A maximum of 2,5% exposure to selected other assets as defined

• An overall limit of 45% for exposure in infrastructure investment (and a limit of 25% per investment)(introduced since January 2023),

• and a maximum limit of 25% per entity means that not more than 25% of a fund's assets may be invested in one entity (company), irrespective of the asset class, except for government investments.

These limitations, therefore, apply to RA’s, Preservation, Pension and Provident Funds, but not Living Annuities.

Why Do Many Companies Limit Offshore Exposures in Living Annuities then?

As a financial planner, I can see why investors can easily get confused here, as many product providers have in the past stated in their marketing material it’s “in the client’s best interest to enjoy the protection of Regulation 28”.

Having had this information drilled into you for 30 years, it’s not surprising that clients feel that it’s irresponsible to go against the grain or that they are going “rogue”, and this is not the case.  For the high-net-worth investor or person living abroad, a far higher allocation may be suitable to match the asset allocation with the goal.  

Various investment companies in SA still limit offshore exposures in Living Annuities though. While the regulation gives more protection for investors to some extent, it's questionable for knowledgeable investors to be subject to these limits. Do keep in mind it’s a regulation and not a formal requirement as such.  

The actual reason though, is that investment houses in SA are also overall subject to these greater limits in their books. Therefore, if they are close to these ceilings, they then limit this on an individual basis to investors to safeguard the overall limits their side, that they are required to do.

Old Mutual has never yet needed to implement this for individual clients, due to their scale in the marketplace including the size of their locally managed cash solutions as used by many individual and corporate investors, as well as their pension fund book (which is, of course, subject to the limitations).

Therefore, when using Old Mutual, Living Annuity investors can choose to have 100% of their Living Annuity in underlying offshore investment funds if they so wish.

For several non-Old Mutual product providers, I regularly get an email update to say that just for the next short while, they have the capacity for more offshore underlying funds. As a preferred brokerage for a limited period subject to capacity, they can offer this via ourselves.

And then a few weeks later it’s closed again as an option. For the same reason, they may even cap their life-wrapped investments too.

As a result, in terms of legislation, this can constrain the product provider to put these steps in place.     

Investors contributing over many years to their RA or Retirement Fund at work, and in the regular updates get reminded of this Regulation, I find it very easy to believe when investors forget this after they retire via a Living Annuity.

For all these reasons, in our discretionary managed solutions for Retirement Annuities and Preservation Funds targeting the same investment returns, we have one version that falls within Regulation 28 and another version with greater offshore allocations that doesn’t. The version outside the regulation cannot be accessed in RA’s, Preservation, Pension and Provident Funds, but can be used via Living Annuities (as well as voluntary investment portfolios).     

This functionality is an industry first, although only those with enough foreign capacity will be able to offer it.

After that, if you have a Living Annuity and want larger offshore exposures, you can do so. More details about the Living Annuity, Preservation Fund, Retirement Annuity, Pension and Provident Funds are here if you click on each.

FRIDAY FOOD FOR THOUGHT