Going offshore for a retirement plan
Coreen van der Merwe, the managing director of Sovereign Trust South Africa, which is part of the Sovereign Group, an international company specialising in wealth management services, says: “Offshore investments have always been part of so-called high-net-worth individuals’ investment objectives, but we’re seeing a boom in the numbers of middle-class South Africans who want to move their money offshore and diversify their assets and investments for a more secure retirement.”
An internationally accessible offshore retirement plan may be an attractive option for South African residents with foreign citizenship, South Africans spending long periods working abroad, those looking at emigrating or retiring abroad, and those simply wanting to diversify their offshore investments. There are also international occupational pension scheme options for companies that have an offshore staff complement.
In South Africa, the government offers substantial tax concessions for saving in a local retirement fund - your contributions up to 27.5% of your income are tax-deductible, to a limit of R350 000 a year, and all investment growth in the fund is tax-free. On retirement, the first R500 000 is tax-free, but you pay tax on your income from an annuity, which you must buy with at least two-thirds of your savings in the fund.
You do not receive any of the tax concessions on contributions to an offshore scheme, so it would be a form of discretionary saving. However, there is typically considerable flexibility in your use of the money once you reach retirement age (which, for some jurisdictions, is as low as 50). And you would, in a recognised retirement vehicle, be exempt from being taxed by the South African Revenue Service on investment growth. When the growth is paid to a South African tax-resident retiree, 40% of it will be taxed in South Africa at the retiree’s marginal rate applicable at the time.
Van der Merwe says her company is seeing more instances of people putting their 27.5% or R350 000 into a local retirement fund to get the tax deduction, but anything above that is going into an offshore pension scheme.
She says the international pension market has become so competitive that, while previously these plans would have been in the reach of only high-net-worth and ultra-high-net-worth individuals, they are relatively accessible to middle-income earners.
Van der Merwe says when it comes to costs, a rule of thumb for investing in any type of offshore structure is that the annual administration fee charged by a trustee should not be more than 1% of the investment. Sovereign’s base annual administration fee is £500, so you would need a minimum of £50000 (about R360 000) in such a vehicle for it to be viable.
Regulation of offshore structures
Regulators around the world are tightening up on offshore investment structures, but retirement vehicles appear to be safe from interference. Sean Gillease, business development manager at Sovereign Trust, Channel Islands, says this is because private retirement saving is being “heavily encouraged” in the light of what the World Economic Forum has called a “global pension crisis”.
Gillease, who was speaking at last week’s International Retirement Seminar, hosted by Sovereign, says the crisis - in which governments are battling to finance state pensions - has been brought on primarily by changing demographics, as people live longer. As a result, governments are encouraging people to invest in private retirement plans by allowing these plans to be more accessible and more flexible. At the same time, regulations are being introduced to ensure better governance and investment suitability, while there is a stricter focus on minimum retirement age and people’s rationale for using such plans.
Gillease says concern around misuse is not unreasonable. In South Africa the Davis Tax Committee raised concerns about arrangements that are used for “concealment” purposes - in other words, that are not genuinely used for retirement and succession planning.
The upshot is that if you intend investing in an international retirement plan, you must be able to show its bona-fide nature. It can’t be a “death-bed” decision - you must have some years to go before retirement - and you must use the benefits for your retirement.
“There is certainly no option to postpone using your benefits indefinitely,” Gillease says.
Low-tax or no-tax jurisdictions that provide well-regulated financial services that are easily accessible to international investors - such as the Isle of Man, Jersey and Guernsey - are popular choices for the establishment of international retirement plans. (Note that these islands are self-governing British Crown dependencies that are neither part of the UK nor members of the EU.)
The types of plans available in these (and other) jurisdictions include:
* Qualifying Non-UK Pension Schemes (QNUPS). A recognised overseas pension scheme available to British citizens that reside outside or inside the UK. This is also often used by South African tax residents who invest in UK property.
* Qualifying Recognised Overseas Pension Schemes (QROPS). These are pension schemes recognised by the British government as suitable vehicles into which UK pensions can be transferred when a person moves from the UK. As a result of recent changes in UK pension legislation, this would only be an option if the QROPS is established in the jurisdiction where the person moved to or the QROPS is established anywhere in the EU and the person moved to an EU country.
* Self-Invested Personal Pensions (SIPPs). A type of UK-registered personal pension scheme that may offer more investment freedom and flexibility at retirement than conventional UK retirement plans. They are available for both UK residents and international tax residents.
* 40(ee) Retirement Schemes. A type of personal retirement annuity trust established in terms of Guernsey legislation. Many of these plans are specifically designed for South African tax residents.
* Occupational Pension Schemes. A choice of pension funding structures for companies of different sizes.
BENEFITS OF OFFSHORE PLANS
According to the website of Machrie Brokers in Trichardt, Mpumalanga, offshore retirement plans offer the following benefits:
* A tax-free income in retirement (rather than a tax deduction on contributions while working).
* Assets are protected in a safe haven that is unaffected by political and economic turmoil while they enjoy tax-free growth.
* On a correctly structured plan, no 20% estate duty, no 3.5% executor’s fee and no capital gains tax is charged at death.
* The investment is protected from creditors and will transfer seamlessly to your nominated beneficiary on your death, meaning you don’t need an offshore will.
* Regardless of where you are in the world, you can make contributions.
* Contributions are very flexible in that you can tailor them (increase, decrease, make ad hoc deposits or stop contributions) to fit your personal circumstances.