Why do Expats cash out their RA’s?

Expatri8 provides an administrative service. We do not give financial advice and we do not sell investment services. We simply assist Expats who have come to the conclusion that they need to get their funds out of SA, and are determined to find the easiest and most cost effective way to do so.  

This page summarizes a number of motivating factors that our clients – Expats like you – shared with us as the reasons for retrieving their remaining funds from South Africa – without delay.  See if you agree.

New Horizons…

South Africans emigrate for diverse reasons. Some South Africans leave the country never planning to return, whilst others plan to relocate only temporarily, but then end up remaining abroad permanently. Their careers develop, their children are born and educated in a First World economy, their parents may join them in their adopted country, etcetera – what used to be FOREIGN eventually become HOME. South Africa may be a great place to visit for holidays – especially if there are still family members – but it is no longer considered HOME.

Many South African Expats retain selected South African assets or investments. They may even plan to return to SA in the future, or simply maintain a holiday home back in the ”old country”. A few even identify new business opportunities in SA and invest in businesses back there, mostly in the import-export arena.

However the majority of Expats settle into a new life abroad, and whilst they may retain their South African passport – and their love for biltong! – they recognize the need to build their financial future in their adopted country.

For most Expats it boils down to 3 basic questions:

Why hold onto investments in a risky Emerging Market economy in Africa when my life is now based abroad?

Is it sensible to have retirement savings stuck back in SA when my funds will eventually be needed to support my First World standard of living?
What will these funds be worth in my First World currency in a few years’ time? Will I still have access to it? Can I afford to wait and see?

Risk Drivers

There are consequently many motivating factors that drive Expats to withdraw their funds from South Africa:

Political and Economic Risk

Most Expats have lost faith in the future of South Africa. They simply do not see the country as a safe place to retain investments anymore. Of course it is a beautiful country and it surely has much potential, but they feel that their country of birth is moving in the wrong direction – both politically and economically.
These feelings are reinforced by daily news headlines: crime and violence, student unrest, militant labour unions, increasingly violent delivery protests, anti-foreigner violence, soaring corruption, wasteful government expenditure, government ineptitude, crumbling infrastructure, a deteriorating investment climate, BEE and land reform, racial identity politics, the recent downgrade to junk bond status, increasingly predatory burdens heaped on the taxpayer, a devloping debt crisis, and many more depressing developments.

In addition there are serious problems in education, and the feeling that the country is getting left behind in today’s technologically advancing world. So why gamble on any unlikely upside potential when you do not have a vested interest in the country anymore?

Currency Risk

A currency is like the share price of a country. The starkest manifestation of political and economic risk is seen in the performance of the currency, the Rand (ZAR) against First World currencies. The historic trend speaks for itself – and that was in the good old days, before junk bond status and the highly charged political atmosphere that currently prevails.

The Rand is one of the top 20 most traded currencies in the world. It is also very volatile. It is extremely difficult to predict short term movement.

But the long-term trend is convincingly negative, as the opening graph on this page clearly shows. Above is a similar graph of the Rand’s performance against the Australian dollar. This picture is the same across a basket of First World currencies. 

Expats worry about future buying power: what is their Rand-based investment worth today, and what will it buy them in foreign currency in 5 years from today?

In addition to currency depreciation risk, there is also the nature of the investment in which funds are tied up. Retirement products are by their very nature not high-growth investments; they are managed under very conservative mandate, typically resulting in low annual returns. Expats rightfully question whether their investment returns in South Africa will beat both local inflation and medium- to long-term currency depreciation.

Exchange Control Regulatory Risk

This is a danger that causes great anxiety for Expats with assets back in South Africa. For many years the assumption has been that Exchange Control will continue to be relaxed, and eventually be abolished completely. However the government has come to appreciate the benefits of exchange controls too; it acts as a shock absorber when political or economic crises lead to sudden confidence loss.
The SA government is already struggling to derive enough tax revenue to balance the budget. Government debt is rapidly increasing, at huge cost to the economy. Patronage politics is becoming more difficult to pay for. As the country sinks deeper into junk bond territory, there may follow an acceleration of investment withdrawals. Borrowing will become very expensive or impossible. A hard-pressed government could easily turn to populist measures by following the examples of Russia or Venezuela, returning to a more restrictive regime instead of fixing its own failing policies or political actions.
Such expedient currency restrictions – potentially including lower capital allowances and/or withdrawal penalties – will be well received by the average voter (who often views it as “white minority capital” fleeing the country). But it will be disastrous for the currency exchange rate and for the Expat with funds trapped in SA. 

Prescribed Assets Risk

Junk bond status (i.e. sub-investment grade) means borrowing costs escalate. It is becoming more difficult and expensive for SA to borrow funds from international investors to prop up failing parastatals. Alarmingly, there have subsequently been documented internal ANC discussions about forcing pension funds to invest in government bonds. This was the sanctions-driven practice during the days of Apartheid – then accompanied by very stringent exchange control legislation. Few South Africans will today be happy to see their retirement savings forcibly invested in failing, poorly managed and corrupt state entities like Eskom, Transnet and South African Airways.

Tax Legistative Risk

The struggling economy, corruption, labour unrest, deteriorating currency, and junk bond status are all factors making it more difficult for government to balance the budget. It recently raised the top individual tax rate to 45% and lowered the threshold for dividend tax. It also appointed the Davis commission, which is investigating a host of new taxes targeting so-called “white minority capital“. This includes lowering capital gains tax thresholds or raising the tax percentages, more onerous inheritance and donations taxes, and now a serious consideration (already at the public consultation stage) for a new ”wealth tax“. The latter is based not on income but on the value of existing assets in an individual’s name – including property and investment funds. Again, these will not be unpopular with the voting masses.
Expats are naturally concerned that such new taxes will eat away at the extractive value of their investments.

Individual Financial Need

Some Expats urgently need the funds in their adopted country, closer to home. They may have fallen on hard times, or the funds may be required to purchase assets that are needed to settle into their new life – for example a vehicle, property, or to fund a commercial project. Or an urgent medical or educational need may arise. Or there may simply be better long-term investment opportunities closer to home.
Whatever the reason, many assumed that funds stuck in RA’s cannot be retrieved, when in truth it is accessible for Expats who have settled abroad permanently.

International Retirement Planning

Many Expats have made a firm decision not to return to South Africa. So the question arises as to why have retirement savings in a Developing Market when their retirement needs are going to be abroad, in the adopted First World country? Would it not be better to supplement their formal retirement investments in a lower risk environment, closer to home?
Then there are the consequences of not doing anything: The bulk of an RA will have to be rolled into a Living Annuity, where it will be stuck permanently. Just the administration required – not to mention the transactional costs – to withdraw a small (and dwindling in currency value), monthly annuity income from South Africa many years into the future, is a sobering thought.

Portfolio Diversification

Some Expats retain selected investments in SA, especially if these are in higher growth instruments such as specific property or business opportunities.
But a major driver for Expats – as for local residents – to invest abroad is to diversify their overall financial exposure. The intention is to invest the major part of their wealth in First World markets in order to lend protection against systemic (country-specific) political and economic risk.

The motivations set out above are by no means exhaustive, but they are the ones mostly frequently advanced by Expats who decided to cash out their policies. (Some of these topics are elaborated on in blog form – see the Resources tab.)