The impact of currency fluctuations on offshore investments in living annuities

As an investor with 10X, you can allocate 100% of your living annuity offshore. Understanding the benefits and risks of offshore investing is, therefore, essential. Retirees are increasingly including some offshore exposure in their living annuities to access opportunities in the offshore market, diversify their portfolios, and hedge against local market instability and Rand depreciation. Understandably, investors may have concerns about the South African market, the future, and the exchange rate. This often leads to seeking investment opportunities offshore.  

A living annuity is a post-retirement investment product that allows you, as a retiree, to draw an income while keeping your funds invested so your savings can continue to potentially grow and compound. Investing offshore presents potential opportunities, as well as risks, such as currency fluctuations.  

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10X is an authorised Financial Services Provider, a licensed Retirement Fund Administrator and Investment Manager. In this article, we will explore the impact of currency fluctuations in more detail, the importance of asset allocation and low fees, and strategies to manage the challenges that may arise due to currency fluctuations.  

What is a living annuity? 

A living annuity is a flexible retirement savings investment vehicle that you, as a retiree, would make use of post-retirement. You can transfer your retirement savings to a living annuity upon retirement, and from there, draw an income from the living annuity. A living annuity is a long-term investment, typically in place for 20 to 40 years. Your savings are invested in the living annuity, and as a retiree, you select the appropriate funds to invest in within the living annuity wrapper, according to your risk tolerance levels, financial needs and time horizons.  

A living annuity offers great flexibility in terms of the income you receive and its frequency. You may draw an income of between 2.5% and 17.5% per annum. This drawdown rate can be amended each year to meet your existing financial needs and income requirements. You can choose to receive your income monthly, quarterly, biannually or annually. With 10X, you select the underlying funds within which your capital will be invested. Your fund selection may be amended as your financial requirements or retirement plans change over time. 

Why retirees use offshore funds in living annuities  

Retirees often choose to make use of offshore funds within their living annuity wrapper, as it offers access to opportunities available in the international market. The South African market is relatively small, with it only making up less than 1% of the total global market capitalisation, so it makes sense that you may wish to seek offshore opportunities.  

Offshore investing is also a good way to hedge against any potential depreciation of the Rand and local market stability over the long term. It’s important to note that while Regulation 28 of the Pensions Fund Act applies to retirement products, it does not apply to living annuities. The regulation puts a limit on the amount of offshore exposure you can take with retirement products such as retirement annuities and preservation funds. The current legislation allows for a maximum of 45% to be invested offshore.  

As this regulation does not apply to living annuities, you can invest up to 100% of your living annuity offshore, as long as this is offered by your service provider. Some providers are not able to offer this due to internal investment limits. At 10X, you can invest 100% of your living annuity offshore with no issues.  

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This may especially appeal to investors who already have a number of local investments in South Africa and wish to diversify more offshore. To find out more about our 10X living annuity, speak to our knowledgeable and experienced investment consultants.  

Understanding currency risk in living annuities  

Currency risk, which can also be called exchange rate risk, refers to the potential loss that may occur due to changes in currency value when compared to another currency’s value. The value of your investment may change due to the fund's performance, and the value of your investment may also be affected by currency risk.  

How currency volatility affects retirement income  

As a retiree drawing an income for a living annuity invested offshore, you may find that the income you receive will vary from year to year with currency fluctuations. This is because the income that you receive depends on the exchange rate at the time of your income withdrawal.  

When relying on this income for your living expenses, you may experience unpredictable cash flows, depending on what is happening around the world and in South Africa. This can have a knock-on effect, which will have an impact on currencies around the world, including the Rand. 

When the Rand strengthens against the currency of your offshore investment, the amount you receive in Rands may decrease, even if your offshore fund performs well. This could place pressure on your retirement budget, particularly if your living expenses are Rand-denominated. For example, if your living annuity is invested in US dollars and the Rand strengthens against the US dollar, you will then receive fewer Rands at the end of the day. If the Rand weakens against the dollar, you will then receive more Rands when you receive your income from your living annuity. 

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Asset allocation and offshore exposure: Finding the right balance 

The approach you take to your asset allocation and fund choice does not necessarily need to be an all-or-nothing approach. As an investor, you may wish to diversify across the different asset classes like equities, bonds, real estate and cash in order to take advantage of positive market returns in some asset classes while also mitigating against risk in other asset classes. The same approach can be applied to local market investing versus offshore investing.  

You may wish to tailor your portfolio to incorporate both local and offshore funds, thereby spreading your risk across the asset classes. Your selection should be based on your financial needs at that time and adjusted as your financial needs and requirements change. You should consider your living expenses in Rands and how you can ensure you can cover these expenses despite potential currency fluctuations.  

Additionally, you should consider looking at the local inflation rate and how this might potentially affect the real returns you receive in your back pocket. Finally, you may also wish to review the returns being realised offshore, and how much of your portfolio you wish to invest offshore, bearing in mind that the international market is a lot bigger than the local South African market.  

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10X offers a range of funds within the living annuity wrapper, each of which has a different mix of asset classes and is therefore suited to different investor profiles. To view the funds we have on offer at 10X, follow this link. 

Fees and the EAC of offshore portfolios 

The Effective Annual Cost (EAC) was implemented in 2015 by ASISA. This is a standardised metric which allows you, as an investor, to see the total fees and costs of owning an investment product over a one-year period. This information can then also be used to compare different service providers. The EAC is comprised of the following:  

Administration fees: These are the fees which are associated with the administration tasks related to the fund. This would include tax and compliance tasks. 

Advisor fees: These are the fees charged by an advisor for their knowledge and advice. They will often charge an initial and an ongoing fee. 

Management fees: These are the fees charged for the management of the fund.  

Other fees: These may be additional fees, such as early exit penalties.  

Your fees can play a major role in the potential growth of your living annuity. A lower EAC allows for more of your returns to be reinvested and potentially grow, while a higher EAC may mean that there are less returns available to be reinvested and compound over time. As a retiree, it is important that you are aware of all fees that are being charged on your living annuity.   

You can find your EAC on your investment statement. If you are not able to locate your EAC, you may request it from your service provider. This allows you to see all the fees and costs being charged on your living annuity. It also allows you to ascertain if there are any additional fees or costs involved when making use of the offshore funds within your living annuity wrapper.   

Let’s take a closer look at how fees can impact the growth of your living annuity over time. In the following example, we will compare 3% in fees to 1% in fees to highlight their impact over the long term. Let’s assume the following factors:   

• Investment period of 30 years 
• Investment of R1,000,000 
• Return of 12% per annum  
• An inflation rate of 6% 

Scenario 1: With 1% in fees, after 30 years and after adjusting for inflation, your real investment value sits at around R3,985,000.   

Scenario 2: With 3% in fees, after 30 years and after adjusting for inflation, your real investment value sits at around R2,310,000.   

We can see that just a 2% difference in fees is equal to a difference of R1,675,000 in real investment value over 30 years, clearly highlighting the importance of low fees. Note that the above example is for illustrative purposes only, and actual results may vary. You can learn more about the importance of fees here.  

10X offers a free EAC calculator, one of the tools available as part of our online suite of resources. You can use this to view the fees and costs associated with a 10X product, and you may then use this information to compare with the costs charged by your current service provider. 

10X understands the importance of minimising fees, and we offer a transparent, low-fee product offering with a simple fee structure, while focusing on generating excellent returns in the long term. For more information on our fee structure and how this varies between products, please visit our website. 

Index tracking vs active investing: Costs and control  

Index tracking refers to the tracking of a particular benchmark index with the aim of generating returns that are similar to those of the benchmark. This is in contrast to active funds, where a fund manager aims to pick the right funds in an effort to obtain the best returns they can.  

Index tracking is often more cost-effective, as there are less expenses incurred with this process. Active funds, on the other hand, may incur more costs due to activities such as research, analysis and trading in an effort to reach better returns as well as hedge currency risk. This can then result in potentially higher total costs and higher fees for you, as the investor.  

As data from the SPIVA Scorecards suggests, index tracking may outperform active management some of the time. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending 31 December 2024.  

10X makes use of an index tracking investment strategy with an active approach to asset allocation in an effort to keep fees on the lower side of the spectrum. This makes us an affordable long-term investment option with a superior track record. To find out more about the 10X living annuity, follow this link. 

Summary of risk mitigation strategies for currency-linked investments  

As an investor, implementing risk mitigation strategies can protect you against the risks of currency-linked investments. You may want to consider diversifying across both currency and geographical regions to mitigate against any currency and/or region-specific risk.  

If you do decide to make use of both local and offshore funds within your living annuity, you may want to consider using a local fund for your living expenses and then making use of an offshore fund for potential growth and chasing good returns.  

You should also avoid currency switching as much as possible, and rather take the long-term view of investing. This allows your returns to potentially grow, and you can take advantage of the benefits of compound growth over the long term. 

Conclusion: offshore investing with your living annuity  

Offshore investing comes with both potential risks and potential rewards. The international market brings with it many opportunities for potential growth, but there is also the risk of currency fluctuations. Always consider the risks and benefits when making investment decisions.  

By making use of both asset allocation and a low-fee provider, you can set yourself up with a solid base in which to deal with any currency fluctuations that may occur with offshore investing. You should also annually review your living annuity to ensure that it can still provide for your financial needs and meet your retirement goals.  

10X believes in low fees, superior returns and exceptional service. To explore how a 10X living annuity with offshore exposure can support your retirement goals, speak to one of our expert consultants today.