Do not get this call wrong!
Estimated Time To Read: 7 minute(s) 34 seconds
A number of people are losing faith in South Africa and have chosen to cash in and emigrate.
Other South Africans are also losing faith in the government and the country. There is a real sense of fear in the air but they have no intention of leaving. Maybe they cannot afford to leave or perhaps they realise that despite all the negativity around them this is an awesome place in which to live. It certainly beats living in a flat over the Greengrocer in Swindon.
For those agonising over their future, here are a few rules of the game they should consider:
Rule 1: Fear sells
More people are saying that they don’t want to make contributions to Retirement Annuities this year. Or that they want to cash in their Preservation funds and take what they can offshore. There is plenty of discussion around the braai, fuelled by the fear factor. The aftermath of State Capture, Eskom, prescribed assets, and the possibility of a downgrade are among the long list of issues that are giving people a reason to just get their money out of here.
So let’s slow this down and go through the numbers…
Rule 2: The power of compound interest
So why should we be contributing to a retirement fund?
In this example, we assume the investor is a top-earner paying tax at the 41% marginal rate. When you contribute to an RA, you get the benefit of the tax deduction at this rate, while still investing the full amount. When you eventually start drawing a pension, your tax rate is generally much lower, helped by the ability to deduct some of those medical expenses that your medical aid doesn’t cover.
Without RA With RA
Income earned pre-tax R350,000 R350,000
Contribution to retirement fund R0 R350,000
Income tax payable 2020 @ 41% (R143,500) R0
Amount available for investment R206,500 R350,000
In summary, you have now locked in a pre-tax loss/gain of 41%. The after-tax savings will be subject to interest, dividend and capital gains taxes. The pre-tax money in your retirement fund is not subject to any tax and is also exempt from estate duty. And don’t forget that your retirement fund can’t be attached by creditors. Compound the difference over time and if you’re planning on staying in SA, you’ll be a whole lot better off if you stick with the retirement fund.
The second scenario is to withdraw as much money as possible out of your retirement funds and take the proceeds out of SA. We will use the extreme example of a full withdrawal from a Preservation Provident Fund, with an investment value of R5m. This withdrawal will then be taxed according to the withdrawal tax tables.
Preservation Provident fund withdrawal (100%)
Capital Withdrawal Tax rate %
R0 – 25,000 0%
R25,001 – R660,000 18%
R660,001 – R990,000 27%
R990,001 – 10,000,000 36%
If you withdraw the R5m, SARS will deduct the tax before you can get your hands on any of the money. So, after a tax bill of R1,647,000, your R5m has rapidly reduced to R3,353,000.
So that’s a 33% loss to take your retirement money offshore. Ouch. This is the equivalent to the bottom of the stock market crash in 2008.
Now here is the point. Assume you are invested in a run-of-the mill Balanced unit trust. Every fund manager in the country has already taken the maximum 30% directly offshore. Conservatively, they are also invested in large rand hedge stocks that do not count towards the 30% offshore limit (Prosus, Richemont, all commodities stocks, BAT etc). You could reasonably assume there is another 20% invested in these types of shares, granted to varying degrees of success.
If this is true, you could have 50% of your retirement fund offshore already! The other half would be exposed to SA, and yes, potentially some prescribed assets such as government bonds. Which by the way, retirement funds invest in anyway, especially now given good yields. Even the foreigners love SA bonds – we’ve never defaulted on the debt and they can get a whole lot more than 1% or 2% on global bonds.
Rule 3: Learn from history
So, if you do achieve your goal of getting all your money offshore, what could possibly go wrong??
You might remember 2001 when Thabo Mbeki was President. He thought that some players in the ANC were plotting against him, and there was a run on the Rand. It was a scary time to be in SA. The Rand went to R13.53/USD$. The brightest business minds bonded their big houses to the hilt and took the money offshore. Phew, now we are safe…
Rule 4: Never sell at the bottom
From that point they bought into offshore equity, primarily US equity (S&P Index: 1140). Then, surprisingly out of nowhere, the Rand strengthened in December 2002 to R8.58/USD). The offshore equity cycle turned and dollar prices collapsed in December 2002 (S&P Index: 899).
It took around nine years for the S&P to recover these losses. It took the rand 14 years (until September 2015) for this market to recover to the same level on a dollar basis.
The rand also strengthened to R5,68 in December 2004 (a -42% loss in currency and a stock market loss in dollars of -4%). Just to rub more salt in the wounds, interest rates on home loans were at 15% at the time.
The question to ask in February 2020 is: are global equity prices currently quite high? Are global bond markets over-priced? Is the dollar very strong against most currencies? Most commentators believe all of these to be so. Is history about to repeat itself?
Rule 5: You never know what is going to happen
We are not saying that you must stay in SA. Nor are we saying that you should invest all your assets in SA. It is not a dead certainty that SA will bounce back.
What we are saying is that if you do get caught up in the fear of the moment and are in danger of following the herd, then you need to make really sure that you are doing the right thing for you and your family. Cashing in your retirement savings, like trying to time the stock market, is a recipe for disaster, and is a mistake that you may never recover from. Unless, of course, SA is doomed for ever, which we really do doubt.
Wisdom in financial advice
If you want to live in SA and/or you have very little chance of being able to afford to move overseas, then we think that you should approach this with a solid framework. Go see a Financial Planner – a CFP™ Professional – and find out how much capital you need in your retirement funds to afford your lifestyle. (Remember these funds will have between 30 – 50% in offshore assets).
You want to ensure that you are able to meet your liabilities in SA and to do this you need to have some rand-based investments. In the early 2000s, the people who took their money out quickly had SA inflation to deal with, and with their assets in weak offshore markets, compounded by a strong Rand, their SA lifestyles took a triple whammy. SA markets then took off in 2003.
When giving advice to clients we have found that it is not about binary moves (e.g. choosing black or white). Rather it is about knowing what you don’t know and then leaning into a move rather than jumping completely.
Once you know you have enough assets in SA to afford your lifestyle, then build up any surplus savings in offshore assets slowly over time, preferably directly offshore. But, unless you’re an expert, don’t make the mistake of trying to choose your own funds. It’s a big scary market out there, with too much choice, plenty of dodgy options, and the potential of not being able to access your capital (think of the UK property funds that were ‘gated’).
Make the right call
Although a terrible idea, I don’t think prescribed assets would lose as much as you would if you cash out or don’t contribute to your retirement fund. After watching SONA, it may feel like a time to make big decisions, but you don’t necessarily have to make big calls. You might just need to adjust your tactics, knowing full well that you do not know what is about to happen.
Whatever call you make, get someone to take the fear away for a while, put a decision-making process in place and then make the incremental adjustments needed. Don’t concentrate on the right call, rather focus on the best call.
Good luck making the best call for you and your family.
Rules of the Game
• Fear sells
• Compound interest is the most powerful force in the world
• We don’t know what will happen next
• Don’t sell at the bottom
• Don’t buy high
• The US stock market looks expensive and global bond markets are very expensive