Pension funds, emigration and tax factor
INVESTING in an offshore retirement fund is one way of growing your wealth in a stable economy over the longer term, or even gaining residency in a foreign country. However, for South Africans, this scenario presents as many challenges as it does opportunities and should only be considered after consulting with a financial adviser and tax expert.
When you invest offshore directly, whether in a retirement fund or another funding vehicle, the tax aspects can be tricky to understand and a number of factors must be considered.
If you fall foul of the domicile-specific tax rules, you could end up losing a large portion of your investment when you retire and start to withdraw funds, or during the inheritance process after your passing. And, if it’s not set up properly, your investment could also expose you to more taxation.
With regard to pension funds in South Africa, there are three basic scenarios, and two of them preclude moving one’s contributions into an offshore component to enable financial emigration or offshore retirement.
The first scenario is a membership in an employer-sponsored retirement fund. In some circumstances, an employer will create a free-standing fund and then appoint a board of trustees to make fund-related decisions.
These types of funds have fund-specific rules, and anyone who joins the fund (via employment) must follow them, including the limited portfolios in which you can invest. The underlying investment portfolios might have some offshore exposure.
In the second scenario, where contributions are made in someone’s personal capacity into an “umbrella” fund, it is typically the fund’s trustees that determine where the contributions are invested. At NMG Benefits, when we look at the asset allocation for a retirement fund, we generally include an offshore component to mitigate local risks and hedge against the rand.
The third scenario is where someone saves for retirement in an offshore fund – and this is an appealing option when it comes to retirement savings as it allows for actual variety. Normally, as a South African-domiciled investor, even if your portfolio is properly diversified, you are most likely committed to rand-based funds which come with an inherent risk. However, when investing in an offshore retirement fund, the annuity could sit completely offshore and may be a vehicle that enables financial emigration. Generally, although not always, international retirement plans enable financial freedom by giving members the freedom to buy and sell assets within the structure, without triggering related capital gains tax.
Another way to fund an international retirement plan is to use funds already taxed and cleared and being held in an offshore bank account or direct investment vehicle. Such plans have tax benefits for members, but these are by no means the sole advantage. Portfolio diversification is a key benefit, as is the security that comes with investing in jurisdictions that are both politically and economically stable, as well as being well regulated and having measures in place to combat fraud and money laundering.
However, many factors should be considered before taking the plunge – including fund options and structures, domicile-specific interest rates and taxes, rules around withdrawals and estate planning, and overall risk. The closer you are to retirement, the lower the risk you should be exposing yourself and your investments to. Ultimately, the biggest decision is the selection of a qualified, experienced adviser to guide you through tax implications when investing offshore.