Yes, you should invest offshore. But, timing and the where and how is worth investigating. The biggest mistake is making an emotional “knee -jerk” decision. This often leads to taking on inappropriate risk and at the worst time, often after the horse has bolted. It’s important to make a rational decision and to take your money offshore for the right reasons.
A few critical questions to consider before investing offshore include: what percentage of assets, direct or indirect, where, what product, which investments, what asset allocation, taxation effects, estate planning /duty implications, timing?
We answer these questions with our 18 frequently asked questions.
What are the benefits of investing offshore (outside of South Africa)?
South Africa represents less than one percent of the world economy and restricting yourself to local investments means you will lose the opportunity to invest in some of the biggest and most successful businesses and markets in the world.
It is important to diversify between local and offshore investments, to ensure that you spread your risk and gain exposure to different asset classes.
What percentage of my net assets should I invest abroad?
This depends on your personal long-term goals and risk profile. Everyone is different.
In theory, you should match your % offshore investments to your % offshore spending to protect against an erosion of local purchasing power.
A general industry guideline is:
Aggressive or (+10 years investments) 50% to 100%
Moderate or (5 to 10 years investments) 30% to 50%
Conservative or (3 to 5 years investments) 10% to 30%
Retirement savings are restricted to 30% offshore and 10% in Africa (ex SA).
How can I invest offshore?
There are two options when investing offshore: indirect offshore or direct offshore.
1. Indirect offshore investments allow you to invest in offshore assets (also known as global
assets) without the money physically leaving South Africa. This is done by investing locally in
“asset swap” unit trusts. No tax clearance is needed, and the investment performance and
investment value are reported in Rands.
2. Direct offshore investments can be invested in global unit trusts or cash accounts, in hard
foreign currency such as US Dollar, Sterling or Euro. This is done by transferring your money into
an offshore account.
What is the difference in costs between investing directly offshore or indirectly offshore (in
It is cheaper to invest directly offshore as this removes the layering of fees, and direct offshore funds have lower management fees than their equivalents in South Africa.
Is it risky to invest offshore?
Investing offshore does have additional risks as you will be holding foreign currency assets, and hence your investment value will fluctuate as the Rand strengthens or weakens. Therefore, a longer-term investment holding is advisable to avoid potential disappointment in the short term (a result of currency volatility).
How much am I allowed to invest directly offshore?
South African residents are allowed a R1 million single discretionary allowance per calendar year (for travel and other purposes), with no SARS clearance certificate required.
Additionally, individuals whose tax affairs are in order can apply for a foreign capital allowance to take up to an additional R10 million per calendar year out of SA, subject to SARS clearance and SA Reserve Bank permission.
Are there other ways I can gain offshore exposure?
Apart from buying foreign currency, Rand hedging can be achieved by buying shares in JSE-listed
companies that sell products and offer services outside of South Africa or have large foreign operations.
Examples are Naspers, Richemont, BHP Billiton, etc.
Investors can get exposure to JSE-listed shares by investing in:
– a unit trust portfolio with equity exposure or
– a private client share portfolio.
What are the past returns of the local stock market compared with offshore markets?
Over the very long term (90 years) South African and Global equities have provided similar Rand returns of around 7.5% above inflation. However, over the last five years, Global equity returns above inflation have been 13% p.a. versus South African equities of 3% p.a. This is largely due to the abnormally low local economic growth averaging just 1.7% p.a. But in the previous 10 years (2003 to 2013) SA equities returned 15% p.a. above inflation versus Global equity returns of 6% p.a. in Rands.
Do I not get a lot of offshore exposure through my local investments?
Yes. Around 50% of JSE shares comprise offshore global companies. Therefore, its performance is largely driven by global economic and political forces.
The local portion is largely made up of banking and consumer-related shares and therefore not
corresponding to the make-up of the country’s GDP. Manufacturing, agriculture and construction are a much larger part of the economy than represented on the JSE, while government and state-owned
enterprises make up a sizeable portion of economic activity but have no representation either.
What happens when I pass away with offshore assets?
Individuals require a will and an executor/solicitor for every jurisdiction in which they hold any assets.
Therefore, if you have any investments/monies directly offshore and these measures are not in place, the winding up of your global estate can be an arduous and expensive task, sometimes taking years to conclude.
It is important to seek the advice of an experienced wills and fiduciary specialist to put the necessary measures in place.
What are the income tax implications of holding offshore investments?
South African residents are taxed on their worldwide income as South Africans are taxed on a residence basis and not on a source of funds basis.
Any taxable income or capital gains produced by the investment/asset must be declared for tax in South Africa on the received by or accrued to basis.
What are the estate tax implications of passing away with offshore assets?
Certain jurisdictions have estate taxes that are much higher than the rates of estate duty in South Africa.
For example, an individual with UK assets not domiciled in the UK is still subject to inheritance tax on their UK estate.
UK Inheritance Tax is currently charged at two rates:
• £0 -£325,000 is charged at 0% (“the nil-rate band”).
• Above £325,000 is charged at 40%.
SA-domiciled individuals who are non-US citizens with US assets are considered as a non-resident alien (NRA). The exemption for US Estate Tax for a NRA is set at only $60,000 with a top estate tax rate of 40%.
Can I mitigate estate tax implications on my offshore investments?
It is possible to make use of certain vehicles such as sinking funds to mitigate or avoid foreign estate taxes on your foreign investments by ‘wrapping’ the assets.
Wrapping the investments allows you to nominate a beneficiary on these investments, thus you can
avoid the need for a local or foreign executor to handle the assets. The investments will pass directly to your nominated beneficiaries.
How much of my pension or retirement funds can I invest in offshore assets?
Regulation 28 in the Pension Fund Act limits the extent to which retirement funds (like retirement
annuities) may be invested in particular categories of assets. The main purpose of Regulation 28 is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios.
Currently, investors can invest up to 30% of their retirement funds in offshore asset classes, with an additional 10% allowed in non-South African asset classes.
Can you invest your living annuity in direct offshore assets (in hard currency)?
A South African living annuity can only be invested in Rand-denominated funds and hence they cannot invest directly into foreign funds in hard currency such as the US Dollar.
Living annuities can however invest in asset swap funds and there is no limit to the offshore exposure one can take through these funds.
I plan to emigrate or move abroad; can I take my pension fund or retirement annuities with me?
Retirement funds such as a pension fund, provident fund or retirement annuities can be accessed preretirement in the case of a few certain scenarios, one of which is formal emigration.
If you plan to formally emigrate from South Africa, you can apply to take an early withdrawal from your retirement fund to take the money with you. This withdrawal however will be subject to the retirement fund lump sum withdrawal tax table, with a maximum tax rate of 36%.
If you plan to move abroad but not formally emigrate, you can leave your retirement funds invested in South Africa until your return.
I plan to emigrate or move abroad; can I take my living annuity with me?
A living annuity (or linked retirement income product) cannot be withdrawn upon emigration or relocation.
If you plan to relocate outside of SA, the best solution is to leave your living annuity funds invested in SA and draw a monthly or annual income ranging between 2.5% and 17.5% per annum, which can be converted to the currency of your choice.
In this way, you continue to keep your funds invested in South African investments, but you withdraw and convert your income from the investment into the country or currency of your new residence.
What are the offshore options for my endowment policy?
A local endowment is a 5-year investment policy which offers several income tax and estate planning benefits to high-net worth individuals.
A local endowment cannot be invested directly into offshore investments in foreign currency. However, an endowment can be invested in offshore feeder funds which provide indirect exposure to global markets.
If you would like direct offshore exposure in foreign currency, you can disinvest from your local
endowment and reinvest the funds in a foreign endowment in foreign currency.