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Can South Africans contribute to an offshore annuity?

Reader asks what options are available.

I am wary of continuing to make contributions to my current retirement annuity because of Regulation 28 restrictions (very limited offshore exposure), the weakening rand, the political threat of more control over annuity funds and where the money should be invested, as well as very poor returns over the past five years (actually losing money). What options are available for SA citizens to rather contribute to an offshore annuity fund?

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Dear reader,

Thank you for your question. Yes, there are some offshore options available. We will provide a bit more detail below, but as always there will be more to it than we are able to mention in this response. We recommend that you engage with a qualified financial advisor on a one-on-one basis to select an option that is most suitable for your personal financial situation. There may be several discretionary options available to you that may not come with the complexity of a foreign pension structure.

The foreign pension industry is filled with acronyms, from SIPPS to QNUPS to RATS and more. Luckily, the international retirement industry is not that different from ours. It is often a matter of finding the jurisdiction that is the most tax-effective and least restrictive.

Below is a summary of some of the main differences between the offshore options and your local retirement funds:

Local vs foreign retirement products

  Retirement annuity (SA) International retirement plans
Tax deductibility of contributions Yes, up to certain limits No
Tax-free growth Yes If domiciled in a no-tax jurisdiction
Minimum retirement age 55 From 50 in some cases
Investment restrictions Yes, Regulation 28 No
Restricted benefits Yes. Only one-third may be taken as a cash lump sum when you retire. No withdrawals prior to 55, except for individuals who no longer reside in SA. No
Taxation Tax applies on withdrawal and retirement, with a portion (up to R500 000) exempt from tax. Capital gains tax
Inclusion in your estate No (contributions) No

Source: Personal Finance (iOL) here.

Below are two of the more popular options that South Africans have available to them:

40(ee) retirement schemes (Guernsey)/retirement annuity trust schemes (RATS)

Section 40(ee) of the Guernsey Tax Law of 1975 allows a Guernsey-based retirement annuity scheme to make payments to non-Guernsey residents without any deduction of tax at source. The structure is quite flexible allowing for a combination of lump-sum payments and regular income draws once you’ve reached age 50. They work similarly to our local personal retirement annuities with the member having flexible investment options. Unfortunately, you will not enjoy a tax deduction on your contributions and capital gains tax will apply on the withdrawals.

Self-invested personal pensions (SIPPs)

SIPPs are UK-domiciled retirement plans, but are also available to non-UK residents.

Similar to Section 40(ee) schemes, they offer flexible investment options, giving the member control over their investment and risk profile. You may access your funds from age 55, but unlike the Section 40(ee) product, you may only take 25% as a lump sum. You may take a phased retirement approach.

In both cases, your investment is protected from creditors and does not form part of your estate.

One major difference between the above two products is that the SIPPs allow for transfers from other UK pension schemes, so it is a nice option for anyone who has previously worked in the UK, whereas the Section 40(ee) product does not allow “UK tax-relieved funds” (existing pension benefits) to be transferred into the product.

With no upfront tax-deductibility of contributions in these products, you may want to consider more flexible discretionary offshore investments. While there are estate duty implications, proper planning can keep that to a minimum and the flexibility of full access to your funds as and when you need it remains an attractive feature of discretionary investments.

As the world gets smaller, South Africans have access to an ever-growing range of offshore investments. Speak to your advisor to find the product best suited to your personal financial situation before eliminating any options.

Best of luck with your investment plan!

Do you have any questions you would like answered by registered financial planners?

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Be very careful of supposed offshore pensions. You need to fully understand the underlying structure and the fact that it is not really a “pension”.

For instance, whilst they state that the pension would not form part of your estate upon your death, this is factually incorrect. The pension is actually facilitated through the setup of a trust (in the case of RATS). Your contributions to this trust are seen as a LOAN – you can of course donate to the trust/pension, but this would attract 20% donations tax. Thus the growth on these contributions are essentially not taxed in your estate, as they sit in the trust, but original capital contributions are still part of your estate.

The schemes are also very expensive, due to the layers and underlying investment structures. They are generally miss-sold in South Africa by commission chasers.

I honestly don’t see any reason why a South African would invest into such a scheme as opposed to just investing directly offshore or into a life wrapper offshore.

Great response, I agree 100%.

End of comments.

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