Offshore Investment Accounts

Offshore Investment Accounts

Thinking about offshore investment accounts?

Thinking about opening offshore investment accounts or getting an offshore bank account?

Investing offshore is considered an intimidating process for many people. Investors find themselves in a conundrum when having to choose between various offshore investment accounts and products. Including where and what to invest in.

Lack of offshore investment guidance and knowledge leaves your hard-earned cash exposed to unpredictable economic, social and political factors. Let us show you why having an offshore account should be a top consideration for all serious investors.

Why invest offshore

The most important reason as far as we are concerned is to diversify your investments and spread your exposure. Offshore investment accounts may perform better at times than local investments. Investing offshore also gives you access to a wider opportunity set by letting you access companies and industries that may not be locally available.

Expanding your portfolio beyond your country’s boundaries can offer significant returns that can be less correlated to your local portfolio provided you are willing to take the additional exchange risk.

This currency diversification can at times work against you and at times work in your favour.

If you take a long-term view and ignore all the noise caused by short-term political and trade events then all currencies over time devalue or appreciate relative to other currencies based on the difference in the inflation rates of the countries.

With this in mind an investor in South Africa could realistically expect their portfolio to benefit by the continued weakening in the Rand relative to more developed country currencies. This argument of course is only valid if you are living in Rands and spending Rands locally.

Understanding the purpose of an investment will determine the level of offshore exposure needed for a client.

What makes offshore investing so appealing, is that it offers opportunity to all types of investors young and old, large and small. There is a large variety of methods and options to getting offshore exposure from opening a simple offshore bank account to investing in offshore markets and financial structures that increase tax efficiency.

5 top benefits of investing offshore

Offshore investing offers many benefits; it allows you to spread your investment risk across different regions, currencies and companies. Below we list 5 benefits to investing beyond the country’s borders;

  1. Potential Tax Savings
  2. Asset diversification
  3. Asset Protection
  4. Currency hedge
  5. Confidentiality

A Certified Financial Planner (CFP®) will help you navigate the maze of choices for your offshore investment. Let’s take a closer look at each of the benefits;

Offshore asset diversification

Possibly the greatest benefit of offshore investing and the strongest driving force for investors is that it is an effective way to decrease portfolio volatility by diversifying across industries, geographic locations/regions, currencies and asset classes.

When compared to local investing, offshore investing allows you to lower your risk by gaining greater diversification. It is unlikely that all industries and all countries around the globe will do equally well or equally poorly at the same time.

If you however are invested in a small concentrated market like South Africa then you are more exposed to the actions and conditions that apply to this little tip of Africa.

Tax efficient investments

The potential tax efficiency that can be achieved by using certain offshore accounts, offshore products or offshore structures allow investors to take less risk to achieve similar returns as their local investments because they can reduce their biggest expense - Tax.

Numerous countries offer foreign investors tax incentives. There are good – White list jurisdictions, Not so good – Grey list jurisdictions and bad – Blacklist jurisdictions. Be careful when investing offshore, make sure you use a professional to ensure you stay within the limits of the law while still improving your efficiency.

Asset protection

Offshore investments are a means of legally protecting your assets; they can ensure an individual is shielded from disadvantageous legislation enacted in your home jurisdiction as well as any obligations or liabilities incurred at home and thus acting as a sound way to safeguard your assets.

This is important for businessmen specifically, since there is always risks associated with running your own business and you don’t necessarily want to expose your family’s future well being to your personal or business risks.

your wealth.

 Currency hedge

‘Currency hedge’ refers to offshore investments serving as a ‘hedge’ against a depreciating currency. When a country is faced with a worsening economic climate or political instability, having an investment in a different country could act as a shield of sorts against local inflation.

This benefit is only valid if your investments are growing or earning in a “hard currency” while you spend and live in your local currency. Remember this is a double-edged knife and can cut the other way too, this is why you should have a long-term view on a currency and not be dependent on short-term currency fluctuations.

Confidentiality

Offshore investing yields great benefits for investors seeking more privacy as a lot of offshore jurisdictions offer foreign investors greater confidentiality when compared to domestic investments.

How do I invest offshore?

The procedure of getting money from South Africa to another jurisdiction is the first step to not only growing your investments but also in protecting your money. Essentially, there are 2 avenues through which you can move your money offshore before you decide to invest;

  1. By means of your annual discretionary allowance
  2. Using a tax clearance

The above options normally work in the following way;

A discretionary allowance is an allowance that the Government allows you take out of the country without any tests or measurements against your compliance with regards to your tax obligations at SARS.

This specific allowance currently allows you to take R 1M offshore per calendar year. This includes all monies taken out for travel and investment purposes.

The process works by a means of two steps:

  1. Step 1: Finding a Forex dealer in South Africa who will execute the transaction for you and buy the foreign currency.
  2. Step 2: They will assist you in completing paperwork which essentially is a balance of payment form required by the Reserve Bank and various FICA verification documents and source of funds information..

The second way of moving your money offshore is a slightly different  process  which entails sending through an application to SARS for a tax clearance, NOTE this is not a normal letter of good standing but a tax clearance for foreign investment

The application is only granted once SARS is satisfied that your affairs are in order.

If you owe the Government any money it will be declined. I have seen allowances declined because R34.50 tax was outstanding on a client’s tax, so if you know you are not up to date with you taxes rather sort that out first before applying.

We recommend doing your application with someone who will be able to smooth out the process for you as SARS can be very strict. Once given permission, the process of moving money can begin.

It must be noted that by using this option you can move a lot more than with the discretionary allowance option.

Currently you can move anything up to R10 000 000 per person in a year. The 12 months is valid from the date the certificate is issued unlike the Discretionary Allowance that follows a calendar year cycle.

1.Our recommended process of transferring the funds once you have decided to use the Allowance or Clearance process Appointing your forex dealer. You can always use your retail bank to transfer your forex but be careful, they might say they charge no fees or commission but the fee is built into the “Spread” on their buy and sell rates.

Have you ever noticed the huge difference between the rate at which your bank will buy currency from you and the one they sell to you? Somewhere between the 2 is the “mid” rate or “clean” rate.

I have no problem with banks and forex dealers making money for the service the offer but I find that sometimes the rates offered by the retail banks is excessively high with spreads of 1.5 to 3% on the mid-rate.

For this reason, we prefer to open an Investec Money Fund account for our clients as the first step of sending funds offshore.

This is the starting point for the transfer to take place offshore.

This Account will provide the average interest rate of the top 5 money market funds in SA adjusted daily so you are always sure to get a great interest rate on your funds while they are in the account.

The benefits of this is that you can afford to wait to send your funds when the exchange rate is favourable to you and still earn interest while your money is parked.

2.Once you are ready to send the funds offshore we will usually make use of a forex dealer that uses the Investec dealing desk, this means our clients either pay a flat fee of R 1 500 or a payment based fee of between 0.25% and 1%. This is a significant saving on the costs of using a retail bank.

3.Although not necessary to make an investment offshore we always recommend that a client also open an offshore bank account. This is used to receive funds that pay-out from your investments or to make payments offshore.

If you have an international bank account you will not have to bring funds from your investments back to South Africa before you can make payments or perform other transactions such as make purchases with a VISA or Mastercard Debit card.

Once we have transferred your funds to your offshore bank account that has been established in your name you can invest in one of our international pension plan options or and international investment portfolio.

It is not a necessity to establish the offshore bank account since the transfer from South Africa can be made directly to your international Investment account but if you don’t have an offshore bank account you will not be able to transact offshore since almost all investment providers will only make payments to a bank account in the name of the investor.

Once we have transferred your funds to your offshore bank account that has been established in your name you can invest in one of our international pension plan options or and international investment portfolio.

It is not a necessity to establish the offshore bank account since the transfer from South Africa can be made directly to your international Investment account but if you don’t have an offshore bank account you will not be able to transact offshore since almost all investment providers will only make payments to a bank account in the name of the investor.

How secure are offshore investment accounts? 

There are a variety of factors that determine the security of your offshore account such as;

  1. The country where it is located
  2. The financial state of the bank where the investment is located
  3. The volatility of the currency in which the deposit has been saved

An offshore account that is maintained in a country with depositor protection and strong financial regulation as well as a stable currency and a financially sound bank will generally have a high degree of security / safety.

At the end of the day, South Africa represents only 0.5% of the global economy.

If you are not invested offshore you leave yourself open to concentration risks where the economy, political landscape and regulations of a single country will determine your financial future and not always necessarily for the better.