The current protracted political and economic uncertainty in South Africa lures investors to become emotionally driven when making financial decisions, which should not be the case, says Karlin Pather, PPS wealth manager.
Even in these current volatile conditions, investing offshore allows you to benefit from a broader global universe. This means that you are not only limited to what the South African market offers but more opportunities to invest in long-term growth sectors, such as technology.
As of June 2021, any of the top five listed companies in the world is greater than the combined value of all the companies listed on the Johannesburg Stock Exchange (JSE).
Saying “past performance is not indicative of future performance” is accurate. It is, however, helpful to look at past performance figures to help you make a more informed decision.
This graph reflects how the MSCI World Index performed over the last five years, relative to the JSE. You will see that the growth of the MSCI outperforms the JSE by some margin.
Scenario 1: Those who believe the grass is greener on the other side
In this instance, where clients plan to leave South Africa in the foreseeable future, I suggest they start moving all their liquid funds offshore as part of their annual offshore allowance and expose themselves to as much offshore as is allowed within their retirement products.
As it currently stands, Regulation 28 of the Pensions Fund Act 24 of 1956 limits equity exposure in retirement funds to 75% whether local or offshore.
Further to this, foreign investment exposure is limited to 30%. Therefore, they should maximise this 30% and look at holding dual-listed stocks. This is because you want to start building and protecting your wealth in the currency that you will retire in or live off one day.
It would, therefore, not have a significant impact if the Rand appreciates or depreciates, as your investments are domiciled in the currency that you will be retiring in.
Scenario 2: Wait and see
Clients who are unsure whether they will leave or stay in South Africa could start exploring the benefits of dual citizenship, leaving such an option open for them anytime in the future.
Regarding asset allocation and planning, these clients should typically have 50% of their assets offshore and 50% local – so that they hedge offsets in the movement of the currency.
Allocation does not need to be held per product but rather on a holistic portfolio level. For example, because you are limited to 30% offshore exposure in your retirement savings, you
could diversify your discretionary investments more offshore to create a holistic portfolio allocation of around 50% offshore and 50% local.
I do have clients who want their children to one day study overseas, so for them, we have increased the offshore exposure.
Scenario 3: #ImStaying
In this scenario, clients do not need to hedge the currency exposure. They are usually comfortable with the majority of their assets exposed to local investments and in rand.
Anything between 30% and 50% offshore exposure is attributed to a well-diversified and possibly tactical portfolio construction. Offshore allocation should be part of a holistic, diversified and long-term financial plan.
I usually discourage considerable offshore exposure because you do not want to hedge your retirement savings against the currency you will ultimately retire in and live off. It is also dangerous to presume that the Rand will always depreciate to the Dollar or any other currency. What if it holds steady or continues to appreciate against the Dollar? The risk involved is just too high.
Which routes could you go?
There are two ways of gaining offshore exposure. You can either go direct or indirect.
The implications of emigrating your money
Firstly, if you want to emigrate, you must seek comprehensive income tax advice. It would be best to speak with your tax practitioner in South Africa and a tax professional in the country
you want to emigrate to.
In some countries, you are “deemed” a tax resident on the day you arrive, so your assets, foreign (e.g. South Africa) and domestic (in the new country you are in) are taxable.
If you still have investments in South Africa, for example, a home that you are renting out, this could have significant tax implications if you decide to sell.
It is essential to consider that exit capital gains tax (CGT) could be applied on assets as a deemed disposal when you break your tax residency, even if those assets are not
necessarily disposed of at that time.
Different countries have different rules and it is crucial to get expert advice on this matter. Understanding the tax residency rules for the country you are emigrating to is critical to ensure your financial health.
Secondly, you need to keep in mind what your age will be at the time of withdrawing your pension. If, for example, you withdrew R8 million (after your three-year waiting period), you
would pay in the region of R2.8 million in tax.
If you waited until retirement, you would pay around R2.6 million on an R8 million withdrawal, effectively saving in the region of almost R200,000.
So, if you are in your thirties, you may opt to pay the higher tax rate and make the withdrawal, as you may have concerns that the tax rates could change by the time you retire, and perhaps you believe you have enough time to make up the difference and invest your balance in a currency that you think will appreciate over time.
Thirdly, you may opt to take a third of the fund value in cash and use a South African living annuity, but only if this makes sense from a tax point of view.
Living annuities do not have to comply with regulation 28 like pre-retirement funds, and you could invest the underlying assets in international feeder funds that would have virtually no South African holdings, effectively taking the risk of rand volatility off the table.
You can channel this income directly into an offshore bank account. So, this could be a viable option for some. However, you would need to understand the double tax agreement between South Africa and your country of tax residence on the lump sum and the living annuity income.
- By Karlin Pather, PPS wealth manager