SAVING FOR YOUR RETIREMENT - OFFSHORE
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.
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.