The intended retirement reform being discussed by Treasury of late, has dire implications for all SA expats whom have left the country and still have some form of retirement funding that was left behind. Although the intention of the proposed reform is to alleviate the State from the burden of caring for the aging population in future, this is not good news for SA expats intending to retire in a new home country other than SA.
In the last two years the Rand declined for example with 23% against the Australian dollar putting huge pressure on South African emigrants who rely on the income from their SA living annuities.
The value of a typical living annuity, assuming no growth, worth R1 million in 2010 is only worth R770 000 today in Australia – this is after the Rand declined from R6.91 on November 2010 to R9.01 November 2012.“South African emigrants are not allowed to redeem their full South African living annuities or pension funds when they emigrate,” says Ryno Viljoen, managing director of cashkows.com who have assisted thousands of South Africans to emigrate financially.
Prior to formal emigration, legislation currently only allows a SA expat to surrender one third of the value of the fund in the form of a once off capital withdrawal, net of tax ranging from 18% to 36% on this amount. The balance of two-thirds must be invested in a South African based living annuity where the annuitant has a choice to withdraw between 2,5% and 17,5% income a year, which is taxed at the marginal rate.
“The income is paid by the product provider in Rand to the annuitants South African bank account. Once the annuitant has however recorded a formal emigration from South Africa, the income is usually freely reamittable offshore, which offers a solution to SA expats wanting to transfer their income to their new home country ,” says Mr.Viljoen.
This living annuity is treated differently to retirement annuities and provident funds where emigrants have since 2008 been allowed to cash in and move the total amount offshore prior to the age of 55. Up to 100% from the fund can be withdrawn on which tax is paid.
The SA Revenue Services collects tax from an emigrant when a retirement annuity is early surrendered, based on the current resignations tax table. An emigrant redeeming a R1 million policy will pay R220, 986 once off, at an effective tax rate of 22%
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The question is why the government doesn't allow the same redemption for living annuities as is applicable to retirement annuities? The SA Revenue Service will stand to gain millions of Rand in additional tax revenue from emigrants who is not the government’s responsibility anyway.
“Any weakness in the Rand has been offset by the underlying portfolio in South Africa which has been doing better than many overseas markets. It worked well over the years but it could be disastrous for an emigrant if both turn negative.
“There is a huge mismatch if a South African emigrant in Australia’s living standards is determined by South African investments and living annuities. The discrepancy could be large and the risk should be removed by allowing emigrants to redeem their full living annuities,” says Richard Carter, director of Allan Gray Life.
It does not make financial sense to rely on income and assets from your home country when you emigrate to a new country. It makes more sense to earn income and to hold the majority of assets in the currency where you are living – especially if you have moved from a developing country to a developed country.
“This removes factors like currency risk and inflation which is beyond our control and which have a big effect on our wealth and ability to support our living standards and lifestyles,” says Jason Garner, financial planning coach at ACSIS.
The emigrant is exposed to draw down and longevity risks as the living annuity investor may erode the value of the capital of the living annuity by drawing a too high rate of monthly income and living longer than expected.
“This is correct that an emigrant cannot redeem a living annuity in full. The clients are advised to consult the rules of their specific preservation fund to ensure that they are allowed to access the value of the capital after the defined retirement date contained in the fund rules,” says Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA).
This also exposes the financial advisor who sold the living annuity for South African circumstances and is subsequently managing the investment under overseas living conditions. The overseas circumstances change the risk appetite and needs of the investor as well as the advice given
A financial advisor must determine an appropriate investment strategy and income draw-down rate for a purchaser of a living annuity so as to minimize the probability of financial ruin.
The financial advisors use mathematical models to determine draw-down rates and deciding on the asset allocation of the portfolio. These models make assumptions about parameters like investment return and expenses based on South African circumstances.
The advisor's role is to match the solution to the client’s needs and the asset allocation should be driven by the client’s income requirements. This could be extremely difficult for a South African financial advisor to give advice to an emigrant based in a country the South African advisor does not know.
“If the client emigrates the whole picture changes and the client should have the right to adjust the income annuity accordingly and transfer the annuity in full to the new home country ,” says Viljoen.
What happens now is that many emigrants draw the maximum rate of 17,5% a year as the emigrant wishes to draw the living annuity down as quickly as possible. This is according to Viljoen in contrast with the intention of the product as a living annuity is supposed to produce a level of income that is sustainable for life.
It also places the administrator in a precarious position who must ensure that the rate at which the annuity is currently paid can continue for at least the expected lifetime of the retiree.
The language in the legislation suggests that a living annuity can be guaranteed but this raises a question if an annuitant emigrates to a country with higher living expenses where the income cannot be guaranteed for life, without proper annuitisation.
The irony is that an emigrant can transfer the full amount of a provident fund to the new country after paying the same taxes as is applicable to a retirement annuity. The provident rules specifically allow for the full commutation or access to the full capital value of the investment at that date.
One should consider these retirement options carefully if you want to move to a domicile outside South Africa. The option to bequeath, which is allowed in a living annuity, or a small tax benefit could be attractive but a disaster if a person. Decides to emigrate.
For further information contact:
Ryno Viljoen 0828517384
Richard Carter 021-415 9963
Jason Garner 0825621878
Peter Dempsey 021 673 1620
www.cashkows.com
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