Retirement annuities: How much can you invest offshore?

By Janice Roberts

By Jaco Prinsloo, Certified Financial Planner at Alexander Forbes.

With all the uncertainty in the South African market and concerns about future investment returns, many investors are looking offshore for investment opportunities. A diversified investment portfolio is always a good strategy when saving for retirement but before you set off looking for greener pastures in offshore markets, take note of Regulation 28 and its integration in retirement annuity funds.

Retirement annuity funds are governed by Regulation 28 as per the Pensions Fund Act and prescribe certain maximum limits on the various asset classes you can invest in. Regulation 28 is enforced to protect investors against capital loss and smooth out investment returns by diversifying their investments between different asset classes like cash, bonds, property, and shares. Both local and offshore. The majority of retirement annuity funds will have to be invested in South Africa but you can invest up to 30% in offshore assets and an additional 10% in African assets.

However, with the majority of South African listed companies integrated into the global economy, it is estimated that around 70% of their earning is generated offshore. This feature increases investors’ offshore exposure from 30% to potentially closer to 60% depending on the mandate of the fund. With the added offshore exposure comes risk in the form of currency fluctuations that have to be taken into account when making investment decisions.

The common belief is that the limits of Regulation 28 reduce investment returns which can be true at certain times when specific asset classes outperform, but unfortunately, there is no way to know which asset classes those will be. Having a well-diversified portfolio is one solution to this dilemma. Having exposure to multiple asset classes both locally and offshore gives you the best chance of generating the necessary returns to meet retirement goals without taking any unnecessary risk.

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