What South Africans need to know about offshore investing

South Africans looking to make proper provision for their retirement should consider utilising their full annual foreign exchange provisions and should choose the right offshore investment options to protect themselves from a volatile economic and political environment.

This is according to Sovereign Trust SA.

Many South Africans still feel conflicted about investing offshore, partly because they don’t understand the differences between local and international retirement plans, said Richard Neal, MD of Sovereign Trust SA.

“While offshore retirement funds, like those falling under Guernsey’s 40(ee) regulations, provide a range of advantages over South Africa-based funds, it is vital that potential investors understand the differences between local and international options before committing their assets,” said Neal.

In South Africa, there are three primary retirement provisions – pension funds, preservation funds, and retirement annuities – which are each funded in specific ways.

However, they are limited in terms of how much can be invested in any given financial year, and how and where the funds can be invested. There are also restrictions as to how investors can take their benefits, with pension fund and RA holders having to annuitise two-thirds of their investments.

By comparison, Guernsey 40(ee) schemes are tax exempt for non-residents, and allow contributions in a range of forms. However, the major differences that come in are how the investments are made and how benefits are drawn: there are no geographic or other restrictions on investments, and members can take benefits as and how they prefer after the age of 50.

“It is also important that local investors realise that international retirement plans are not in breach of general anti-avoidance rules (GAAR), as long as they are recognised as bona fide pension schemes, and are administered and run in a proper manner,” said Neal.

Leah Mannie, pensions consultant at Sovereign, highlighted the importance to financial advisers of being able to transfer their clients’ pension funds using vehicles like a Self-Invested Personal Pension (SIPP), which is a way for a UK expat to gain investment flexibility and greater control of their UK based pension.

This is of particular interest to the vast diaspora of British expats living in South Africa and across the world.

For South Africans who have recently financially emigrated, but still have retirement and pension funds in South Africa, the need to transfer their funds into overseas-based pension accounts has become even more pressing, with new tax laws effectively locking their funds in the country for three years.

Mannie said expats should be worried about leaving their retirement provisions behind in South Africa. Apart from an uncertain economic future, SA-based funds are more difficult to manage, and forced investment into prescribed assets could affect their hard-saved monies.

“The worry is that South African based retirement and pension funds will be forced to apportion a fixed percentage of their funds into government infrastructure projects and into bailing out state-owned enterprises,” said Mannie.

“Those who have left South Africa should examine their options for their retirement funds left behind, if they have not done so already.”

Read: This little tax-haven island off England is has become a popular spot for South Africans to invest