High-net-worth individuals, globally-orientated executives and young professionals from across the African continent are increasingly being drawn to including international pensions in their wealth diversification strategies, both from a risk-mitigation perspective and to help build greater certainty into their retirement planning.
In the case of South Africa, the relaxation of exchange control measures now gives wealthier individuals the luxury to save within a local pension as well as an international pension, explains Anthony Palmer, Group Commercial Director at Carrick Wealth. But that is not the case across Africa.
Andrew Moore, MD of Carrick Wealth Zimbabwe, explains that due to Zimbabwe’s very strict exchange controls, the vast majority of Zimbabweans are unable to use and locally hold funds offshore. “The country simply does not have enough foreign currency to allow any to be spent on offshore savings,” he explains. “It is prioritised for fuel and essential imports.”
Working within the restrictions of your particular country’s regulatory system is essential and often requires the advice and guidance of a wealth management expert. Equally important is making astute personal decisions about how to allocate savings to the offshore space, being particularly mindful of your personal circumstances and financial goals.
While traditionally the domain of high–net–worth individuals, offshore investments with retirement portfolios are attracting higher numbers of middle–class Africans. Whether you’re working abroad, have foreign citizenship, are planning to immigrate or are simply looking to diversify your retirement portfolio, offshore pension schemes are worth understanding.
What you need to know
While it’s a relatively common global practice in politically stable countries, less than 10% of South Africans have invested in international pensions, despite the fact that they’ve been around since the 1970s. Moore, looking at the Zimbabwean market, adds: “I would be surprised if there are more than 1% of Zimbabweans with offshore pensions.” A notable reason for this, he explains, is that over the past two decades there has only been a five-year window (2010-2015) during which Zimbabweans had the freedom to send money abroad.
Country risk coupled with currency risk means that Zimbabweans who did have local pensions lost everything because of a devaluing Zimbabwe dollar. So a local pension cannot really be relied upon and individuals are pushed to make alternative plans, be it investing in local property or – for those working out of the country to earn hard currency – through private offshore pensions.
“People recognise that it makes sense to increase the percentage of their international savings,” says Palmer. “These international savings need to be truly independent of your place of residence, meaning that you can make withdrawals outside your home country and do not have to invest in local assets.”
But how much money should you have to consider this option?
In some cases, this is also determined by regulators. Palmer explains that, in the case of South Africa, “our International Corporate Pension is specifically suitable for executives and top management who have disposable earnings in excess of R350 000 per year. This is the maximum local pension contribution allowed that qualifies for a tax deduction. So, for South Africans it makes complete sense to utilise the tax benefits up to R350 000, but for any additional retirement savings an international pension could be used.”
Types of pensions
When it comes to selecting an offshore pension, Palmer explains that this option should not replace an existing pension housed in your home country. “Rather it should be viewed as a supplementary pension that can be built up in hard currency and in assets that are not available locally,” he says.
Used in this fashion, and managed by expert fund managers with secure, diversified investments spread around stable markets internationally, “it will provide peace of mind and is robust retirement planning”, says Palmer.
When saving for retirement in an international pension, you need to decide whether it is through an individual or corporate pension. This difference can be summarised as follows:
- Individual: You are the member and contributions are made from after-tax discretionary money, already in your name.
- Corporate: This is between your company and an international pension administrator, with individualpensions established for each member under the corporate umbrella.
It really is essential for clients to understand all the options available to them and equally important to have an investment portfolio designed to fit their retirement objectives. An independent financial advisor is key in this regard so that all options can be brought to the table and the merits of each discussed so that informed decisions can be made.