Offshore Investment Products

Offshore investment products

 

When it comes to your retirement and the planning thereof, being covered by international pension plans could provide you with the benefits that you seek.

Offshore investment products enhance your investment portfolio

Don’t wait for the Rand to take another nose dive. Weigh up your options with various offshore investment products and make the most of a world of opportunities beyond our borders.

The purpose of any investment portfolio is to grow and protect your wealth. Protect it against inflation, currency devaluation, political and economic instability and unnecessary taxation.

To clarify right from the start you need to understand that there is a distinct difference between tax avoidance (the use of legal structuring) and tax evasion (the illegal non-payment of taxes).

Often the only time people hear about offshore financial matters is when someone high and mighty has used an offshore jurisdiction to evade taxes but what never makes headlines are the millions of cases where ordinary people just make good investment decisions and make use of savvy planning to be as efficient as possible.

Offshore investment doesn’t refer to some secret and shady tax haven like some people think, it literally means investing in anything that is not in your home country, that’s all and there are some very good reasons to do so.

If you are not invested offshore, you are missing many opportunities to both grow and protect your wealth. You are also probably exposed to some serious concentration risks. What we mean by concentration risks is that all your eggs are not only in one “basket” but in a very small “basket”.

South Africa only represents about 0.5% of the global economy, that means that if everything you are invested in (property, shares, funds and your own business) is in SA then you are missing out on 99.5% of the possible opportunities in the world. It also means you are not as diversified as you may think.

We all know that diversification reduces risk and normally people think of asset diversification between Cash, Bonds, Property and Equity but what about geopolitical diversification?

There is no protection by being diversified across assets when all of them are affected by the same tax law changes, the same political events and the same currency.

There are multiple ways to invest offshore each of which is discussed below, they are:

  • Offshore exposure through a Locally managed Offshore Investment Fund either directly or used within a product such as an Endowment, Retirement Annuity, Tax Free Savings Account etc. These typically take the form of a unitised life fund or a collective investment scheme (Unit Trust)
  • Buying a Rand Hedge Share on a local exchange such as the JSE
  • Direct Offshore Investment made by taking the money out of the country

Offshore exposure through a locally managed fund

This is when a local asset manager pools client’s money in a Unit Trust / Collective Investment that is denominated in Rand. The fund manager invests in offshore shares, funds, property etc on behalf of the clients.

This gives you the benefit of growth when the Rand devalues but you will still have to receive your returns in Rand in South Africa when you withdraw or take an income.

This method offers fairly low costs with pretty good diversification but still leaves you exposed to local risks when having to withdraw or cash out because payments have to be made in South Africa in Rand.

Buying a Rand Hedge Share on a local exchange such as the JSE
This is an indirect form of getting offshore exposure. This is done by investing in a company that is listed on a South African stock exchange but earns its income offshore or sells its products in a foreign currency such as most commodities and products that are mined which are priced in USD.

These companies offer protection against the devaluation of the Rand but are more exposed to Political & Economic Risks than offshore funds since they have to operate in the local environment.

The reason they protect against currency devaluation is that if they operate in South Africa and pay most of their expenses in Rand but earn their income in say USD then as the Rand devalues they become more profitable but remember that knife cuts the other way too and as the Rand strengthens the profitability of such companies are put under pressure.

The second way that such companies can protect against currency devaluation is if they are dual listed which means that they are listed on a South African Stock exchange and another international exchange.

Since the price should mostly be the same across the exchanges for the same share when the Rand devalues the price of the share should increase on the South African exchange to keep its value in line with the listing based in a foreign currency on the international exchange. In this way the value of your investment is protected.

Keep in mind that there is a concentration risk since there are only a handful of companies that are Rand Hedges in South Africa and you are limited in terms of the industries you are exposed to. Mining companies specifically have been hit hard and even though they are Rand Hedge shares the industry itself has offered very volatile returns. The benefit of this method is that it is simple and cheap.

Direct Offshore investment made by taking the money out of the country
The last method of offshore investing is to actually take your money out of the country and invest it offshore with an international asset manager, International Retirement Plan provider or directly yourself in an asset you are comfortable with.
The process of investing funds directly offshore is as follows:

    1. Send the funds offshore by either:a. Using your discretionary allowance of R 1m per calendar year – No permission needed
      b. Applying for tax clearance through SARS and the Reserve Bank to invest up to R10m per12 month period from when clearance is granted.
    2. Use a forex broker to send the funds from South Africa to your offshore investment. In South Africa you can’t make international payments directly offshore from your local bank account. This is because we are still one of the few countries in the world that has exchange control. You need to use an authorised dealer so that the reserve bank can keep track of in and out flows of capital. You can use your local retail bank, but it is not recommended since their fees / spread (the difference between what the exchange rate is and what they charge you) is anything form 1.5% to 3.5%It is often better to use a dedicated forex dealer since we have in most occasion been able to decrease fees to 0.25% to 1%.
    3. Receive the transferred funds in your Offshore Bank Account. This is not necessarily a requirement since you could just transfer the funds directly to your investment or brokerage account, but we prefer to open an offshore bank account for all our clients investing offshore since you then always have the option to have your investment pay out into your international bank account in a currency of your choice. This gives you the option to choose to either receive your investment proceeds internationally or in South Africa instead of being forced to receive your funds here.
    4. Lastly you can transfer the funds from your offshore bank account to your Offshore Brokerage account or International Retirement Plan etc

When setting your financial goals, investing your hard-earned money offshore should form part of your plan.

We are often asked "how much should I invest offshore?", as a rule of thumb we recommend that you consider investing between 40% to 50% of your overall wealth offshore. Your personal circumstances and goals will determine what is best suited for your individual needs and we strongly recommend that you consult with a Certified Financial Planner Professional before making your investment decisions.

Align your interests, spread your risk and "don’t put all your eggs in one basket." Rather let us guide you with your offshore investment product selection.
To offer you a full range of investment solutions, International Trust and Company establishment, we have partnered with reputed offshore investment and Corporate Services Providers to enable you to not only take advantage of offshore investment opportunities but to also structure your investment in the most efficient way possible.

There are 2 ways to structure your investment offshore:

1. Invest directly in your own name by opening an Offshore Brokerage Account or investing in any other offshore asset such as a property or fund. If you invest directly in your own name you will be liable for all the normal Income Tax, Capital Gains Tax, Dividend Tax and Estate Duty at death that all South Africans must pay.

OR

2. Invest via a Tax Wrapper, this refers to investing in anything as per 1 above but doing it through a “Life Bond / Endowment”, International Trust, International Company or International Retirement Plan. The effect of structuring in this way changes the way tax is applied and where it is paid. Often the costs of using the above structures to hold the exact same assets as in 1 will be far less than the tax savings received. Imagine if you don’t have to pay the 20% dividend tax on all your dividends or up to 18% Capital Gains Tax on the sale of an investment. What would the long-term effect of compounding be if your returns are between 20% to 40% higher each year?

With the ever-changing needs in today’s day and age, we have developed a list of products that will guide you into your financial planning success. We assist with;

1. Opening of offshore bank accounts
2. International retirement plans – Tax-free growth and low to no tax pension income
3. Offshore trusts and companies in various jurisdictions to facilitate international business or hold your offshore assets
4. Assistance with obtaining a second passport or residency
5. International property investments
6. International investment portfolios and Offshore Brokerage Accounts with guarantees or market related returns.

Our fee-based independent advice model is geared to assist you in reaching your financial investment goals while we build a long-term relationship with you without the conflict of interest relating to product sales.

How do I open an offshore bank account?

Having an offshore bank account is important to be able to transact offshore (Send and receive funds internationally) it in itself should not be viewed as an investment since cash in the bank will deliver LOW to NO real return after inflation.

The funds need to be invested to receive any real growth.

Your offshore bank account is a parking facility to facilitate investment or a place to park your funds during times of exchange rate or market volatility. The only return you could realistically expect from an offshore bank account is the effect of the gain in value if your local currency devalues.

Generally offshore bank accounts will offer significantly lower rates of interest than what South African investors are used to, however keep in mind that you are earning interest in a “hard currency”.

In terms of opening up/starting an offshore bank account, the first step to any offshore activity begins with opening a bank account. Our 4-step basics are as follows;

1. The necessities

Opening an offshore bank account does not stray too far from the process of opening a normal account in your country of residence. Initially, banks will request personal information; such as citizenship, birth date, proof of residence and tax number etc. In South Africa this is often referred to as FICA requirements referencing the Financial Intelligence Centre Act. Offshore it is commonly called KYC – Know Your Client and / or AML – Anti Money Laundering Legislation.

2. Deciding on the currency for your offshore bank account

Offshore bank accounts offer you the choice of which currency you would like to hold in the account. Depending on the exchange rate, there may be additional expenses incurred as you may need to exchange currencies to make deposits and withdrawals.

We recommend a diversified mix of the major currencies USD, GBP and EUR. Additional currencies can be added depending on your personal needs.

3. Making the initial opening deposit

The funding of your offshore bank account will take place through the use of a forex dealer who will purchase the foreign currency for you and help you complete the BOP – Balance of Payments form required by the reserve bank to send funds out of the country.
4. Withdrawing from an offshore bank account

When it comes to withdrawing funds from an offshore bank account, banks offer an array of options. To ensure your funds are easily accessible worldwide, most banks will issue a normal bank card that will work at any ATM or Point of Sale that accepts Visa or Mastercard.

The final word on opening offshore bank accounts

Offshore banking is often seen as a complicated and elaborate procedure that is misunderstood by a lot people.

The truth is that it is a relatively simple process when working with a professional advisor with offshore experience, which entails filling out paperwork, supplying identity documents as well as one or two additional documents to support and prove your source of funds (where the money came from e.g. your south African fixed deposit or a local share portfolio etc.) and source of wealth (How you made your money e.g. Savings form salary or an inheritance etc).

Whether you wanting to do something as simple as open an Offshore Bank account or something as complex as owning multiple offshore properties through an offshore trust and company structure, we will be happy to assist you every step of the way taking the uncertainty out of the complex offshore environment.