After the February 2022 budget speech, the South African Reserve Bank (SARB) increased the offshoreinvestment limit within retirement funds from 30% to 45%.
What are the implications of this for you, the investor?
While investing in retirement funds has always made financial sense (more about that below), the constraint on how much of those funds could be invested offshore may have been a deterrent for you. With the more generous constraint in place, investing in a retirement funding vehicle has become more attractive.
Retirement funds maximise investment growth (using the taxman’s tailwind)
There is a sizeable gain to be made from putting your money into a retirement fund as opposed to, say, a unit trust.
It’s this: the tax break received when investing in a retirement fund could enable you to invest up to 81% more. That extra investable amount goes a long way if you are trying to catch up on your retirement goals. And once invested, your capital grows free of any income tax, capital gains tax or dividends tax while it remains within the retirement fund.
What’s the catch?
One limitation is that you may not cash in the investment at will (except up to one-third once-off at retirement) and you will have to pay tax (albeit it at a lower tax rate) as you withdraw income from this investment when you are retired.
The other constraint is that you are restricted as to how much you can invest offshore. The increase of the offshore limit (formerly 30%, now 45%) makes the retirement fund investment vehicle more attractive if you are not currently using it due to wanting greater offshore exposure than it formerly permitted.
What’s good to know is that when you retire, your retirement fund is transferred to a Living Annuity, which can invest 100% offshore if required (subject to the administrators’ overall limits with SARB).
What does this mean for you?
If you are an investor who would like more offshore exposure but formerly were not able to get it due to the fact that most of your capital is invested in retirement funds, you will now be able to increase your offshore exposure by 15%.
Also, if you are an investor trying to catch up on your retirement savings, but want higher offshore exposure, you may now feel more comfortable with using a retirement fund.
What do we recommend?
At Netto Invest we have always recommended healthy offshore exposure, so we feel that this change sends a positive message to the market and is a move in the right direction. It is always better to have a limit that you don’t use than to have a needless constraint.
It’s as important as ever to diversify the asset allocation within your portfolio, so speak to your Certified Financial Planner (CFP)™ at your next review about how best to take this into account in light of your own particular circumstances.
By Ian Beere, CFP® CA(SA)
