There are several dedicated retirement structures available to South African expats. Navigating these options and deciding which suits you best, along with how to invest these assets, hinges on several critical questions that need answering before making any decisions:
Retirement Annuities, Provident Funds, and Preservation Funds are examples of onshore retirement accounts offered by South African institutions.
When considering these provisions, the pivotal question remains: How do you want to invest your assets? It's your money, and many expats may have never revisited their initial asset allocation or fund choices since setup.
In 2023, amendments to the Pensions Fund Act, known as Regulation 28, aimed to safeguard wealth by reshaping how South African expats manage their retirement funds – a positive step forward.
Regulation 28, part of the Pension Funds Act, protects investors from poorly diversified portfolios, ensuring prudent investment before retirement to avoid excessive risk exposure.
Supporters argue it shields pension funds from high-risk ventures, though critics suggest it limits long-term returns. Recent adjustments to Regulation 28 provide more flexibility to expat investors, but is it sufficient?
Regulation 28 applies to approved funds like pensions, provident plans, preservation, and retirement annuities, regulating their allocation across asset classes including equities, property, and foreign investments. Approved funds meet SARS criteria under the Income Tax Act.
Recent updates to Regulation 28 raised the cap on foreign asset exposure to 45%, allowing expat investors to diversify globally. This shift enables exploration of offshore opportunities beyond South Africa’s market limitations:
Additionally, no more than 25% of fund assets can be in any single entity.
Regulation 28 amendments prohibit investments in cryptocurrencies due to their volatility and lack of regulation. Retirement fund trustees have a fiduciary duty to the fund and its members, and exposing retirement fund assets to cryptocurrencies is not considered in the best interest of fund members.
Although the offshore limit has been increased to 45%, 55% of retirement fund capital must be invested in South African assets. This can be challenging given the shrinking number of listed companies on the JSE, limiting local investment choices.
The JSE (Johannesburg Stock Exchange) currently has 442 listed companies. With a total market cap (all the companies share value combined) of $1.3 Trillion USD – when comparing this to the global market cap (total global equity market) – which at the time of writing this - currently stands at $123.5 Trillion USD.
In simpler terms, South Africa’s Equity market currently equates to roughly 1.05% of the global market, yet South African based Equity Retirement Funds generally hold 45-60% allocation to this 1.05%. In keeping with the 55% regulated allocation to SA assets.
If we look at the sector analysis of South African companies, the vast majority of the equity is comprised of financial based companies (97 total), think Standard Bank, Investec and Capitec. Industrials (46 companies) – Bidvest and Barloworld. And, finally Commodity based “Basic Materials” companies (45 total) – Anglo American, BHP and Glencore.
188 companies or 44.2% of the total South African Market is in these 3 sectors.
Traditionally, these can be volatile sectors when considering global economics, fluctuating material prices and interest rates, all the while facing the challenge of an ever increasingly turbulent ZAR valuation.
Over the last 15+ years we have witnessed the domination of US focused tech companies, most recently, Nvidia, but not excluding the other superpowers of The States such as Amazon, Apple and Alphabet (Google). These sectors have been the driving force of portfolios globally for more than a decade.
With Section 28 amendments increasing the available allocation to international equities, is it still enough? Surely limiting investors to ‘keep things in house’ in SA, an emerging market with numerous social, political and economic issues, we are still enforcing a restriction in how South African nationals, expat or not, can manage their future.
These two charts below, one reporting in USD and the other in ZAR, shows the relative growth rate of major US indexes in comparison the total South African equity market.
Firstly, in ZAR.
In the last 20 years, in relative ZAR terms, the South African Equity market has grown by +145.42% - fantastic right?
In comparison, the most diverse US index, the S&P500 has achieved relative growth of 952.23%. This includes both the devaluation of the ZAR in comparison to the USD but also the exponential growth of US listed companies
Critics suggest early withdrawal to invest in diversified portfolios with greater offshore exposure. However, you must consider significant tax implications and fees associated with early retirement fund withdrawals.
Christopher Bowler and Skybound Wealth Management specialize in guiding South African expats through offshore investment strategies. Expats can explore flexible investment and currency options for optimal growth and tax efficiency.
For personalized advice on managing your assets and exploring offshore investment opportunities, arrange a complimentary consultation with Christopher Bowler and the Skybound Wealth Management team today.
To find out more about this topic and more, please fill in the form below to arrange a call back.
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