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Structure your direct offshore investment correctly, from the start

Do your own research and approach emigration and externalisation of assets with exceptional levels of critical thinking, not based on emotions.

South Africans are currently facing the difficulty of making financial decisions in light of worrying new headlines. Many investors are grappling with planning ahead and making thorough capital allocation decisions despite high levels of uncertainty.  

No one can predict the future of South Africa. Do your own research and approach emigration and externalisation of assets with exceptional levels of critical thinking, not based on emotions. Independent financial advice can help you, but you need to know exactly what you want to achieve (e.g. objectives in order of priority) and then test the outcomes of suggested solutions against these objectives.

Good principles to follow when investing offshore

  • Try to diversify during the good times

Diversification is a universally-accepted healthy approach to successful long-term investment. You will never get the precise timing of ‘perfect diversification’ right.

Fundamentally, however, you need to avoid selling out of depressed markets and reinvesting into inflated markets.

  • Keep the balance

People are naturally good at choosing between one of two (even three) possible scenarios and understanding the accompanied consequences of those scenarios. They are less equipped to accurately predict the outcome from a combination of scenarios, which is what more often happens in reality. Reality is multi-dimensional.

Humans’ natural survival instinct make us focus more on potential negative ‘blind spots’ (the negative what ifs). In a country as diverse as South Africa, we generally do not appreciate the potential of ‘positive’ blind spots. Try to avoid binary thinking/decision-making around your investments.

  • Do not incur irreversible expenses

Do not bring irreversible future costs forward, especially if your actions are based on predicting the future. Withdrawing retirement investments can, in some instances cost investors an arm and a leg – especially if they are taxed at a maximum 36% (per the retirement lump sum withdrawal sliding scale table). Externalising retirement capital normally takes place during an ‘investor’s panic’, without much regard for the exchange rate or current market conditions. You should rather keep your investments diversified and options open, until the necessary evidence presents itself to make a decision based on facts.

  • Focus on administration services and investments with track records

Internationally, the investment universe is vast and there seems to be endless options. I would suggest that you stick with a local investment platform that has a direct offshore offering. This enables you/your adviser to speak to someone on the ground, if you need expertise and assistance. Use investment managers and administration services with at least a five- to ten-year track record.  

  • Include passive investments (index-tracking funds) wisely

Warren Buffett considers passive investment (equity index tracking), an undisputed way to achieve long-term outperformance over most active investment management. It is, however, seldom pointed out that passive equity investment solutions, come with a lot of volatility. The graph below demonstrates that simply investing in equity index trackers, is not suitable for everyone, due to the high levels of volatility and potential short-term losses you can incur. I would suggest you limit the inclusion of passive equity index unit trust funds in the majority of investment solutions, to a maximum of 10% to 20%.

  • Focus on liquidity and estate planning

Investors should place significant emphasis on liquidity when investing. Instant liquidity/optionality at death, is essential for any successful estate plan.

An international endowment structure provides 100% liquidity/accessibility by allowing you to nominate a beneficiary on the investment contract. At the death of the original contract owner (in the absence of co-owners), the endowment pays out straight to the nominated beneficiary, bypassing the administration process of a local deceased estate (with foreign assets).

  • Focus on tax/cost efficiency

Although offshore endowments (life wrappers) are dutiable in your deceased estate, they still pose four exceptional cost/tax benefits if duly registered under the South African Long-term Insurance Act (five funds approach).

RSA registered offshore endowments;

  1. Incur no executor’s fees (nominated beneficiary);
  2. Require no UK probate or a foreign will, due to either co-ownership/beneficiary nomination options for smooth succession at death;
  3. Are exempted from UK/US situs/inheritance taxes at 40% (even if UK > GB£325 000 and US > $60 000);
  4. Endowment income is taxed at a maximum of 30% and capital gains at 12% (without using personal annual tax exemptions e.g. interest/capital gains). Through knowledgeable fund selection, endowment income and capital gains can be taxed at a maximum of 12%. Endowments also trigger no capital gains tax at death.

Many investors consider offshore investments as the ultimate risk diversifier for all South Africa’s current uncertainties. Do not ‘fire-sell’ all your local investments.

Rushing into ‘offshore’ markets without doing the necessary research or considering the basic principles can be costly.

The most expensive words for investors are often, “this time it is different”.

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