Offshore Exposure and The International Pension Plan

The South African Economy makes up less than roughly 0.4% of the Global Economy. I would suspect that number has waned in the last 9 years under the tenure of our previous President, but the fact remains that there is a great deal more outside of South Africa, and as such, diversification and a managed exposure to offshore assets remain imperative for South Africans. By way of example, the last decade has seen both Global Equities and Property outperform all other asset classes in South Africa measured in ZAR.

Asset Class Returns (ranked according to Rand returns) – As at 31 March 2019

“Asset Swap” Offshore Exposure

The most common form of offshore exposure is via “asset swap”; a mechanism granted by the South African Reserve Bank which allows an investment company to invest overseas as well as gain foreign currency exposure at the same time.

Harbour Wealth clients have benefited well from this in our investment strategies over the last 5 years, as our investment team (Harbour Advisory) has taken proactive steps to benefit from the opportunities internationally, whilst economic growth locally has remained anemic. This has contributed to our SA Growth Strategy delivering a return of 17.6% over the last 12 months.

There is a key distinction between “asset swap” exposure and that of going directly abroad as asset swap funds are ultimately to be repatriated to SA and paid out in Rands. The next step is to externalize funds and hold an investment in hard currency.

Direct Offshore Investment – “Well Begun is Half Done”

This then brings us to the other offshore investment route, where funds are physically sent out of South Africa, converting the Rands into a major global currency (USD, GBP or EUR). This investment route is not as simple and seamless, and a lot depends on the structure into which these funds are ultimately housed.

The expression of “Well begun is half done” could not be more apt in this instance. We routinely come across new clients who have direct offshore investments, with a structure that is ineffective or in many cases, non-existent.

The recent changes in March 2019 by SARS in its’ treatment of offshore trust distributions, has meant that one needs to tread even more cautiously when choosing the structure within which funds are held internationally. Harbour Wealth has completed due diligence on International Pension Plans, which offer an exceptional proposition for South African tax payers at a very low cost, relative to other industry avenues.

The International Pension Plan is well supported by local tax opinions, and the trust and administration company we have chosen to partner with, is domiciled in the Isle of Man, which is one of the most regulated financial jurisdictions. The Pension Plan works very differently to what we understand as a Pension Fund in SA, as the product can hold a wide variety of global assets, such as:

  • Immovable Property
  • Companies
  • Trusts

Whilst some tax will eventually be due where our clients are tax residents in the form of CGT only, this is deferred for some time, as CGT would only need to be paid, once the investor has fully withdrawn their total contributions into the Pension Plan. There is no limit to the contributions that can be made to such a plan.

As an example, if a client were to invest $1 000 000 into the International Pension Plan over their lifetime, they will be able to draw their total contributions ($1m) free of any tax. An added benefit currently is that the capital invested into this Pension Plan, are fully excluded from a client’s estate in South Africa, unless the investor nominates his SA estate as his beneficiary.

The table below summarizes the key advantages of the Pension Plan over the most common offshore investment route – the international endowment:

The cost at which the International Pension plan provides this superior value proposition should also be a point of emphasis. Whilst costs should not be the sole focus of an investment decision, they do play an even more pivotal role internationally, where interest rates are at historic lows.

Harbour Wealth is now able to offer our offshore investment strategies within this Pension Plan. The Harbour Advisory Global Growth Strategy has a total Fund TER (Total Expense Ratio) of 0.36%, making it one of the most cost effective in South Africa. The strategy affords investors a proactively managed exposure to global growth assets and continues to deliver exceptional risk adjusted returns in USD:

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