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SAVING FOR YOUR RETIREMENT - OFFSHORE

Theunis Ehlers

Fiduciary Partner

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The importance of diversifying your investment portfolio by including a significant allocation to offshore assets is well known. What is less well known is that this includes investing for your retirement. South Africa makes up less than half a percent of the global economy and opportunities to effectively diversify locally are limited compared to what is available in developed world economies.

 

However, when it comes to retirement funding, South African regulations restrict offshore retirement investment to 30%. After retirement, when the funds have been transferred to a living annuity, it is possible to obtain 100% offshore exposure though. In both cases the offshore exposure may only be accessed through so-called asset swap mechanisms. This means that the investments cannot be accessed offshore and any withdrawals may only be made in Rand, in South Africa.

 

Limited exposure to foreign assets is not ideal from a portfolio diversification point of view. Not only does it make it increasingly difficult to match a member’s future living expenses with the cost of living in retirement, whether it be locally or abroad, but many of our clients are people who wish to build up a portfolio of retirement assets offshore in the event that they decide to move or emigrate at some point in the future.

 

In order to help our members properly diversify their retirement savings, whether they are choosing to stay or move, we partnered with Overseas Trusts and Pensions (OTAP) to create the International Retirement Plan specifically designed for our South African clients.

1. THE CITADEL INTERNATIONAL RETIREMENT PLAN

 

At the outset, it is important to note that the purpose of the plan is to provide retirement capital, whether you retire in South Africa or abroad. The reason for emphasising this point is because similar plans, that have been around for quite some time, have often been “sold” as a clever tax “planning” vehicle.

 

It must be noted that when we developed our plan, we prioritised the objective of retirement funding, while ensuring that the plan is still tax efficient.

1.1. MECHANISM OF THE PLAN

In essence, the plan takes the form of an offshore umbrella trust of which the member is a beneficiary. Each member’s “account” is effectively segregated from all other members’ accounts under the trust.  The plan is registered as a pension plan under Guernsey law and enjoys protection as such.

 

Similar to a local retirement annuity, the member makes a contribution or contributions to the plan. These contributions are made by employing a person’s foreign investment allowance. It is therefore made with funds that are legitimately allowed to be exported from South Africa, once the requirements for such an allowance have been met.

 

It is important to note that these contributions are made from after-tax funds. Off-shore retirement savings are not tax deductible in terms of  South African income tax laws.

 

The nature of the contribution is exactly that – a contribution to a pension plan with a definite expectation to receive future benefits terms of the rules of the plan. It is therefore not a loan or donation to an offshore trust.

Once the contribution is made, it no longer belongs to the member and is therefore not an asset on his or her balance sheet.

 

The trustees of the plan will invest the contributions into a wide range of international investment options. The investment allocation will be done according to your individual investment needs and risk profile.

 

Members become entitled to benefits from age 50. They may opt to either take a lump sum or a regular annuity. Between the ages of 50 and 75 the payment of benefits is paid at the discretion of the trustees, but they will be led by requests from the member. From age 75 onwards, the member will receive a mandatory annuity from the plan.

 

The mandatory annuity is calculated according to the UK Government Actuarial Tables (GAD) which is the accepted methodology used abroad to calculate pension payouts.

 

With regards to succession, the member will nominate beneficiaries to receive the benefits after his or her death. He or she may nominate the surviving spouse or other beneficiaries, to receive the full benefits accumulated in the plan in his or her personal name. A member may also nominate a further retirement plan that will benefit the surviving spouse or their beneficiaries. Furthermore, a member may also nominate an unrelated offshore structure, for example a trust, to receive the benefits.

1.2 PROTECTION AGAINST PERSONAL CREDITORS

Quite similar to South African retirement plans, the plan provides a high level of protection against the claims of personal creditors of the member.

 

As previously mentioned, once the contribution has been made, it belongs to the trust, and is no longer reflected on the balance sheet of the member. Thus, it follows that a member’s creditors would not be able to attach the contribution to satisfy their claims.

 

In cases of insolvency, it may occur that transactions that were entered into, to the detriment of creditors, may be overturned. Should the creditors of an insolvent person seek to overturn the contribution made to the plan and have the relevant amount returned to the member’s estate, they would have to seek to enforce the South African court order against the trustees in Guernsey.

 

The legal advice that we have obtained indicates that a South African court order will not be enforceable in Guernsey. Even if the creditors approached a Guernsey court, we are advised that it is doubtful whether a Guernsey court would find in favour of the creditor as this may be “abhorrent” to Guernsey public policy.

 

1.3 SOUTH AFRICAN TAX IMPLICATIONS OF THE PLAN

 

In order to understand the tax implications of the plan it is best to break it up into the different events that may result in tax implications for the South African taxpayer:

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IN SUMMARY

The International Retirement Plan provides an efficient vehicle to accumulate retirement funds with complete exposure to offshore investment opportunities while providing the benefits of a typical retirement plan.

 

It is important to note that the purpose of the plan is not to replace your other estate and succession planning structures but rather to be employed in conjunction with them. While there are similarities between the objectives of different offshore estate planning structures, for example offshore trust structures and this retirement plan; the primary objective of the Offshore Retirement Plan is to provide capital for retirement. This should also be your objective should you decide to contribute to it.

 

It is also important to consider the type of assets that will be contributed to the plan. One would not consider transferring, for example, your holiday home to your South African pension fund (not that this would be possible. In the same vein, one would only contribute financial assets to the plan for the purpose providing capital for retirement.

 

It is important to note that we have developed our plan to operate as similarly as possible to a South African retirement plans. The objective is to create a retirement savings vehicle that is tax efficient but we do not want to avoid or evade any taxes – an objective that is not always true for some other apparently similar products that are available in the market.

 

It should be noted that this article focuses on our product where individuals apply for the plan and also make all the contributions. We also offer a corporate plan where the employer contributes to plan. In the case of the corporate plan, there are some additional considerations.

 

For a more detailed discussion and assessment of whether the International Retirement Plan may play a role in your broader financial plan, please do not hesitate to contact your advisor to discuss it in more depth.

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Citadel Investment Services Proprietary Limited (registration number 1996/006847/07) is licensed as a financial services provider in terms of the Financial Advisory and Intermediary Services Act, 2002.