In the wake of sovereign ratings downgrades, fiscal pressure and rand unpredictability many South Africans are looking to protect their wealth through increased levels of offshore investment. One option is to add an international retirement plan into the mix.
A supplementary international pension, while it should not replace an existing South African retirement fund, is designed to build up hard currency savings and non-South African asset exposure. Used correctly, an international pension offers estate and succession planning advantages while guarding against currency erosion and the potential for future political and economic shocks.
Funding this flexible option can be done using the single discretionary allowance of R1 million per calendar year, which is available to all South African residents older than 18, or the R10 million foreign investment allowance, which requires South African Revenue Service approval. It is also possible to contribute via existing offshore assets.
For the most part, pensions of this nature are funded through ad hoc lump-sum payments, rather than regular contributions. According to Anthony Palmer, Group Commercial Director at Carrick Wealth: “Clients tend to top up from bonuses, inheritances, the sale of investments, sale of properties, or even cashing in a local pension. I would say an average initial lump-sum payment is around R3 million.”
Offshore pension plans have, historically, been the preserve of high-net-worth clients, but in recent years this net as widened, driven by the desire for greater offshore diversity. “People in politically and economically stable Australia have invested on average 60% of their pension assets outside of Australia, yet for South Africans the figure is only 7%,” notes Palmer. “At Carrick Wealth we strongly believe that South Africans should have a local retirement provision as well as offshore retirement plans for the obvious reasons of diversifying away from South African political risk and currency risk while offering access to a wider spread of investment opportunities.”
Unlike local pension savings, where 27.5% of contributions are tax deductible up to R350 000 annually, you won’t receive any South African tax concessions on offshore pension contributions, but they still are still an important financial planning and structuring tool in a world battling the fiscal pressures associated with inadequate retirement saving.
In light of poor retirement planning, it is essential to get the most out of your offshore plan by ensuring a structure which supports your existing investment portfolio by offering both protection and diversification. Depending on your personal circumstances, this means making some astute decisions upfront, including whether to opt for an individual pension or a corporate offering.
Which route to follow?
An individual international pension is established with you as the member and contributions are made from after-tax discretionary money which is already in your name, explains Palmer.
An international corporate pension is established between your company and an international pension administrator, with separate pensions established for each member under the corporate umbrella. Contributions to this corporate pension are made by your company and/or yourself.
“International corporate pensions have been around since the 1970s and are globally recognised as robust vehicles for retirement planning,” explains Palmer. “However, relatively few South Africans make use of them.”
There are, he adds, great options available, including Carrick Wealth’s International Corporate Pension product, which is well-suited to executives and top management with disposable earnings. Properly structuring such a pension as part of your wealth management plan is, however, vital – from factoring in offshore tax consequences, fees and regulation, to ensuring that the member is still taking full advantage of South African tax concessions.
“Because very few advisors know about these products, it’s always best to partner with a financial advisory and wealth management company that is an expert in the offshore space in order to ensure your offshore retirement planning is effective,” recommends Palmer.
Advantages of an international corporate pension
- Flexible contributions.
- Diverse selection of underlying investments across asset classes, currencies, geographies and industries.
- Gross rollup benefits – while in the pension the assets grow gross of any income tax and capital gains tax.
- The pension is governed by international pension law and provides protection from creditors in highly regulated and stable jurisdictions.
- The pension first repays capital, then capital gains and lastly income.
- Upon death there is a seamless succession to beneficiaries with no probate, no capital gains tax, no foreign will requirements and no executor fees.
- The first R1 million of employer contributions per annum fall outside your estate, so they do not attract estate duty.