Offshore investing 101
With the fluctuating exchange rates and inflation spikes, you might be wondering if investing offshore could be the solution to securing your financial future. Here, financial planner and investment specialist, Michael Haldane, explains why it’s a good id
investing offshore ALLOWS you To
diversify by spreading your risk and allowing you to benefit from a broader global universe of industries, companies, geographical regions, currencies and investment ideas.
‘Although the idea can be intimidating, offshore investing, in my opinion, should form part of your long-term investment plan,’ says Michael Haldane. Currently, South Africa only represents an estimated 1% of the global financial markets, which essentially means that by only investing locally, you’re giving up on 99% of the global market opportunity. With
South Africa being an emerging market, Haldane encourages diversifying and investing part of your assets in developed economies. ‘These developed markets can assist in providing your investment portfolio with more stable growth, a choice of different currencies, different asset classes and the fund managers may adopt different investment strategies.’ Investing offshore won’t only help you to capitalise on circumstances beyond our borders but can also serve as a buffer against our markets.
‘The South African Rand is a volatile currency and very often tends to overreact, which is influenced by economic, political and social unrest. International investing may also offer a hedge for individuals and investors
who fear the depreciation of the Rand,’ says Haldane. If this is an investment option you’re looking at exploring, he weighs in:
KEY points To TAKE into consideration WHEN investing offshore
> Investment terms:
It’s advisable to have a longterm investment objective: no less than five years to allow the portfolio to rebalance if there’s economic or market volatility.
> Risk appetite: Offshore investing can be risky, so investors need to have an appetite for high risk, as the investment may be influenced by the market and currency fluctuations.
> Goals and objectives: Investing offshore may make it easier to fund any international liabilities and help you meet your international goals. You might be planning to emigrate, travel or send your children to a university overseas.
> Currency: Offshore investing allows you to invest in many different currencies. What you want to achieve will determine the currency you invest in.
> Foreign exchange control regulation: There are certain limits on the amount of funds that can be taken offshore per calendar year, these limits are: - If you’re a South African resident, you can utilise your individual offshore allowances of up to R11-million. - R1-million single discretionary allowance:
You can take up to R1 million offshore annually without having to apply for tax clearance.
- R10-million foreign capital allowance: You can use a further R10-million a year, but you need to apply for tax clearance from SARS.
If you want offshore investment exposure, there are various ways to achieve this. Here are some of the offshore investment products that are available to you and their key features:
offshore Endowment
This product offers South African investors a tax-efficient way to invest internationally for a minimum period of five years.
Some of the key features of the structure of an offshore endowment:
> You’re invested directly in offshore funds
> The minimum investment term is five years
> The investment is taxed in the hands of the investment company > Beneficiaries can be nominated, and the following can be selected:
- Ownership can be transferred to a spouse to continue the investment after the death of the principal investor
- The endowment can be paid out to nominated beneficiaries after death and payment can be made to an offshore bank account, as long as the account is in the name of the beneficiary
offshore guaranteed structured investments
Individuals are keen to diversify offshore but at times want some level of capital protection during periods of market uncertainty and volatility, when downside risk is high. There are now structured products available that provide a guaranteed payoff while offering protection against loss. Unlike traditional investments, such as a unit trust, they provide a level of protection against negative returns at maturity of the investment. These investments products also have a minimum investment term that must be adhered to.
Living Annuity WITH offshore Exposure
A living annuity is a flexible post-retirement investment that allows you to participate in the market during your retirement, with the added benefit of choosing a personalised drawdown rate (anywhere between 2.5% and 17.5%). Certain investment companies have made it possible to invest your post-retirement savings directly offshore. You’re not required to get tax clearance, as the funds are allocated using the investment company’s limits.
TRACKER funds
These funds track only a specific market index or a particular segment of the market. These indices are not actively managed and are based on the market capitalisation of the underlying stocks. The funds will give you a return that’s very closely linked to the market. They’re often cheaper than actively managed funds, as there’s less human intervention.
offshore BANK Account
You can also consider opening an offshore bank account, but developed economies often have much lower interest rates and, therefore, your investment in an account will experience closeto-zero growth.
Once you’ve considered all your options, Haldane affirms that diversifying your assets, both domestically and globally, will bring more benefits to your overall portfolio, and result in an improved risk and adjusted returns in the long term. ‘With the vast amount of options available many investors are hesitant and unsure where’s best to place their assets in the global markets.’ He advises sticking to the investment companies and platforms you recognise and seeking the advice of a financial specialist with a good track record in offshore investing.