Hope is a Poor Investment Strategy
Hope or plan?
We all dream about the perfect retirement plan: plenty of time to do what we love and sufficient resources to never stress about finances or meeting unexpected expenses.
But what are you actually doing to make sure you realize your dream retirement? A surprising number of people don’t have a plan. They rely on hope.
Hope that everything in South Africa will be OK. Hope that the cost of living will not keep escalating, and hope that the businesses they are building or the companies that they work for are going to provide.
Hope is a false plan. The reality is that we are all retiring later, living longer, and that old age — which comes knocking far sooner than we expect — brings with it extremely high medical expenses that could stretch your savings to breaking point.
The planning option
SAICA spoke to Carrick Wealth Director of Corporate Solutions Anthony Palmer CA (SA) and Sion Gelgor CA (SA) Wealth Specialist at Carrick about retirement planning, and asked them, first, about saving money.
Anthony Palmer (AP): Saving your money is great but is simply not enough. Life happens and leaving your assets exposed is often not the best idea. This is all the more relevant when investing internationally as investments in your own name often need an international will and winding up of an estate takes up a lot of time, energy and costs. What you should be aiming for is a pot of long-term savings to set aside for your retirement but which are also protected from creditors, from your own entrepreneurial conquests, and from impulse purchases. Money doesn’t buy happiness. But it does make you comfortable and free you from financial anxiety.
SAICA: How does someone shift from a savings to a planning mentality?
AP: Get professional advice. Carrick Wealth is in the business of retirement planning. We understand wealth management, savings plans, the simple power of compound interest, and the destructive power of inflation. Too often, people are caught up in the “now” and at some point their hope slips into fear, and that inevitably leads to inaction. That’s why your retirement must be a plan, not a hope.
SAICA: Where does one begin?
AP: Well, first, you need to actually start. If you don’t start you will never, ever get ahead of the game. Start by understanding your expenses, then be disciplined and systematically reduce them. Go to war on that daily designer cup of coffee, that weekly dinner, the lavish vacations, and those “what the hell” moments when you splurge on some or other extravagance. You will be amazed at how much you can save when you apply your mind and apply a healthy dose of discipline.
SAICA: So, now you’re saving money. What’s the next step?
Sion Gelgor (SG): You need to invest your retirement savings into the markets, because over the long term that is where you will get the most growth. This is an area that can be daunting as there are a multitude of investments and ownership structures to choose from. Tax efficiency becomes an important factor as well as costs, asset protection, access, succession planning, and diversification.
AP: Absolutely. Then you need to look at your pension scheme. Due to exchange control relaxation you now have the luxury to save within a South African pension as well as an international pension.
SAICA: This could get confusing for many people.
SG: Your options need to be evaluated with all the facts at hand and decisions need to be made. You need to ask yourself: what percentage of assets should you keep in South Africa and how much should you tuck away overseas? There is no right or wrong answer and it varies, depending on your personal circumstances.
SAICA: Obviously, you have to factor in the local political and economic environment as well.
SG: Of course. Fortunately, South Africa has a new political leader and the people have renewed faith in the country. However, there are still significant issues that affect our daily lives and create uncertainty about the future. These issues will take a long time to rectify and make a strong case for having an increased portion of your wealth offshore.
AP: I think people recognise that it makes sense to increase the percentage of their international savings. These international savings need to be truly independent of South Africa, meaning that you can make withdrawals outside of South Africa and do not have to invest in South African assets.
SAICA: Such as?
AP: There are a number of ownership structures to consider but an increasingly popular solution is an International Pension. It is important to note that this does not replace your existing South African pension but is rather a supplementary pension that can be built up in hard currency and in assets that are not available locally. Managed by expert fund managers with secure, diversified investments spread around stable markets internationally, it will provide peace of mind and a good retirement option. If you decide to save for retirement in an International Pension, you need to decide whether it is through an individual pension or a corporate pension.
SAICA: What does this mean for the retiree and what does it entail?
SG: Carrick Wealth offers access to individual and corporate international pensions. An individual international pension is established with you as the member and contributions are made from after-tax discretionary money, already in your name. 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.
AP: Keep in mind that international corporate pensions have been around since the 1970s and are globally recognised as robust vehicles for retirement planning, however relatively few South Africans make use of them. For example, 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%.
SAICA: Should everyone consider an international pension option?
AP: It depends. The new International Corporate Pension product is specifically suitable for executives and top management who have disposable earnings in excess of ZAR350,000 per year. This is the maximum local pension contribution allowed that qualifies for a tax deduction. It makes complete sense to utilise the tax benefits up to ZAR350,000, but for any additional savings an international pension should be used.
SAICA: Why are South African pension schemes not using this product?
SG: South African pension funds can only invest up to 30% of their portfolio offshore. But even this is not truly an offshore investment, but rather an asset swap because the investment has to ultimately come back to South Africa. So, by using asset swaps, there is no hedging against political risk in South Africa.
SAICA: Can you list some of the highlights of an International Corporate Pension?
AP: There many, but the most important are:
- Flexible contributions, meaning that you are not committed to regular payments.
- Diverse selection of underlying investments across asset classes, currencies, geographies, and industries.
- Gross rollup, meaning that while the assets are in the pension they 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 ZAR1-million of employer contributions per annum fall outside of your estate and do not attract estate duty.
SAICA: Can you take your local pension and move it offshore?
SG: Unfortunately, the answer to this is no but options now exist to start a long-term retirement plan outside of South Africa and the sooner you begin, the better. The benefits of saving internationally in a robust pension are clear. Given the limits and prescriptions regarding local pensions mentioned above, a good solution would be to taper down local pension contributions and start building an offshore retirement investment as soon as possible. This will ensure that you have sufficient international savings by the time you retire.
SAICA: And your final word of advice?
AP: The right thing to do is to increase your knowledge of the various options available by gaining expert advice on diversification, offshore investment, and international pensions. In other words, abandon hope and rather enter into a dynamic retirement plan.
After all, one’s retirement years should be a time of enjoyment and peace of mind.
To discuss your offshore options and retirement strategy, please contact. Anthony Palmer CA(SA) ([email protected]) or
Sion Gelgor (CA)SA ([email protected])