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Offshore investing, retirement and estate planning

What you need to know.

When saving for retirement, investors are faced with two broad considerations.

They need to accumulate and grow their assets to generate a sustainable income for retirement (solve for a future liability) while also constructing a properly diversified portfolio.

Including an offshore allocation in a retirement portfolio may offer exposure to sectors that are not represented in the domestic market (for example information technology or biotechnology) as well as diverse economies, says Louise Usher, head of business development at investment platform, INN8. The performance of emerging markets and developed economies are not necessarily correlated.

“The solving for the liability – from a currency perspective – may be of more importance but nevertheless to be able to achieve decent growth you need to look at both,” she says.

Against the background of significant political uncertainty and the poor performance of the domestic market, offshore investing has been an easy story to sell. Global diversification is an important consideration for local investors, but it is also important to keep a level head.

Usher says there is a lot of fear and panic and recent volatility have made things worse. It is a fine balancing act, but wealth advisors need to keep a strategic asset allocation in mind in line with the personal circumstances of an investor and stick to an offshore allocation that will put an investor in the best position to achieve their long-term investment objectives.

“It is easy to get swayed where the majority of the market is going and where the fear is and lose sight of actually what good, proper diversification is and that stands the test of time.”

With regards to estate and inheritance planning, Usher says the benefits of investing offshore really comes down to the client’s unique circumstances. Some investors may want to bequeath assets to a younger generation or pay for children to study offshore and may want to set up an offshore trust or permanent offshore residence while others may have South African liabilities that they want to settle at some stage. 

On the tax front, there are not significant differences between investing locally and investing offshore. The one exception is situs tax, which is levied where investors own UK or US domiciled assets (for example, shares listed on the FTSE) directly, but this would only apply to a small segment of the market. In general, investors will need to pay capital gains tax (CGT) on any capital gain and will pay income tax on any interest or foreign dividends declared. The bigger question is whether investors want to own their tax liability by owning the assets directly in their own name, or whether they are looking for a solution that takes care of it on their behalf by investing via a life wrapper where the tax is deducted by the life company, Usher says.

From an estate perspective, offshore assets will form part of the domestic estate, but where assets are owned via a life wrapper product, investors can avoid executor fees of around 3.5%, she adds.

Two popular investment vehicles used to invest offshore are endowments or investment accounts.

With an endowment, the assets are held through a branch of a domestic insurer in the name of the company for the benefit of the client. Investors cannot withdraw more than the initial lumpsum plus 5% and cannot contribute more than 20% more than they did the previous year. A fixed term of five years is applicable, Usher explains.

With an investment account, the investor would hold the assets in their own name, there are no rules around withdrawals and there is no fixed investment term.

Choosing the most appropriate vehicle will depend on the objective of the investment and the individual’s tax situation, she says.

Where investors utilise their full capital gains tax exemption of R40 000 per annum, they may benefit from an endowment because it offers a lower effective CGT experience.

But where investors do not use the full R40 000, it could make sense to use an investment account, Usher says.

Another important consideration is whether the assets are intended to form part of an investor’s estate or if they want to donate the assets to a child or spouse. Where investors want to donate money to children to buy a property overseas, an investment account will be a more appropriate option because there are no liquidity restrictions.

An investment account is also more suitable to first-time investors who may only have smaller amounts to invest once a year or once a quarter. Where investors are extremely wealthy with a significant lump sum to invest, an endowment may be a more appropriate option, Usher adds.

There is a perception that offshore investing is only suitable for high net worth individuals, but it is achievable and attainable for any South African, she says.

Brought to you by INN8.

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