International Pensions: Your Right to Protect and Preserve Your Financial Future

At Carrick we are committed to helping our clients to keep their wealth safe and maintain global buying power which is why we encourage them to invest offshore. 

“South Africans are allowed legally to externalise up to R11 million per person per year – R1 million discretionary allowance and an additional R10 million investment allowance,” explains Anthony Palmer, Carrick Group Commercial Director. There are many structures available to do this, such as international endowments, international trusts, international companies and international pensions. “At Carrick, we put all of these options on the table, and we jointly decide which one best fits your needs and objectives,” says Palmer. “International pensions are, in my mind, one of the most elegant and powerful solutions available.”  

What is an international pension?

An international pension is effectively a pension offered from a country other than South Africa. While many people working abroad may have a pension scheme with their company, a personal pension scheme is one that you take out in your own name and that you fund personally. It takes on average three to four weeks to set up. 

How are they structured?

They are very similar to domestic schemes in that you apply to a scheme for membership. Once your membership is accepted, you make a contribution (which can be regular or single lump sum) and your funds get invested. When you reach retirement age, you can draw a benefit, be it a lump sum or regular payments via an annuity or drawdown, and of course a death benefit applies when you pass away.  

Rex Cowley, Co-founder of Overseas Trust & Pension, a specialist provider of international retirement solutions for corporates and individuals explains, “The main difference between a foreign and domestic pension is that the contributions you make to an international scheme do not get tax relief in South Africa. However, the flip side of this is that the investments don’t have the same constraints as a local plan. So, on the one hand, you’re giving up the tax relief, but on the other hand you’re getting the ability to invest internationally in a constrained manner and to hold up to 100% of the pension’s investments in hard currency. It is this ability to truly internationalise assets which is a significant advantage.” 

Should you replace your domestic pension scheme with an international one?

International schemes should not necessarily replace your domestic scheme, advises Palmer. “I don’t think it’s an either or – it’s an extension in respect of your financial planning. It also comes down to your individual circumstances – suitability and matching assets and liabilities.” 

Advantages of an international pension

Preserve the value of your wealth: Nobody wants to watch their wealth diminish on a global stage or lose purchasing power. By internationalising wealth, you can preserve it and mitigate the economics associated with emerging market currency. 

Risk mitigation: What are your country’s policies? How might that affect your wealth in the future? “Concerns around policy with regards to wealth in South Africa is a big driver for HNWI individuals putting assets into structures that are protected from political risk,” says Cowley. Furthermore, if there is a financial catastrophe, when the dust settles, the foreign pension scheme is protected. 

Peace of mind: We all want certainty that our assets are going to be passed on to the right people and in the right way. “International pensions have flexibility in that succession is dealt with very neatly through the pension scheme,” says Palmer. “Clients appreciate the ability to have those assets moved over to your dependents or beneficiaries very quickly with very little foreign administration or cross border issues.”  

Flexibility: There’s no cap on how much you can contribute to a foreign pension, subject to exchange control limits, and there are no restrictions on stopping or restarting your contributions. Once you get to retirement age, there’s significantly more flexibility with an international pension – you can effectively cash the entire scheme in if your circumstances warrant it. In addition, benefit payments can be retained offshore and do not need to be remitted back to South Africa. This kind of flexibility is simply not available with domestic schemes.  

Tax benefits: Pensions are intended to be tax-efficient in order to incentivise people to save for retirement. There are obvious tax advantages to using pension schemes such as the roll-up of income and gains being free from tax whilst in the pension.  Foreign pensions also deal with foreign tax-related matters very neatly in that the assets in the pension are not subject to foreign estate duties, wealth taxes, or inheritance taxes where the member is a South African resident. In addition, on death, the need for a foreign will, executor, and consideration to situs and foreign probate is all mitigated. This means that clients only have to consider their local tax position. “This makes holding foreign assets via a pension very advantageous compared to holding assets in your own name and consolidating such assets into a foreign pension is a strong trend”, said Cowley. 

Keep in mind… 

The most important law is the law in the country in which you reside. In South Africa, there are legal mechanisms in place to deal with foreign pensions. “Basically, South African residents are welcome to invest in an international pension, but it has to be an authentic pension scheme and be used as such,” explains Palmer. “If you use your pension for what it’s intended (to provide an income in retirement), you’re in a good place. If you start to use a pension to structure highly personalised assets – in other words trying to use the vehicle to achieve some other objective – you’re probably going to find yourself in trouble with SARS.”  

Watch our webinar on investing in an international pension plan here: https://youtu.be/T0nvYWcRCEo