Savings: go offshore but avoid the pitfalls
The spread of Covid-19 remains worrying. The Johannesburg Stock Exchange (JSE) is struggling. Property prices are stagnant. The political scene is volatile. Is it time for South African investors to take a greater portion of their savings abroad for safekeeping? Yes, says Coreen van der Merwe, Director of Sovereign Trust (SA) – but make sure you’re doing it in the right way and for the right reasons.
“Investing offshore shouldn’t be a knee-jerk reaction to current affairs, but rather a well-thought-out process that forms part of your overall financial plan,” she says.
As with anything in life, you don’t want all your eggs in one basket – especially when it comes to protecting your wealth. Diversification is important in terms of asset classes and it can be equally important to mitigate risks by spreading investments offshore. When making investment decisions you need to strip out the emotion and apply common sense.
Some offshore jurisdictions like the Isle of Man, Gibraltar, Guernsey and Mauritius allow clients to set up companies, trusts or pensions plans to hold assets anywhere in the world in foreign currency without levying any tax on income, interest or capital gains. This makes them a popular option for South African investors seeking financial sustainability in the medium to long-term but there’s no ‘one size fits all’ approach.
If and when investing overseas becomes a consideration, it is essential to have a clear picture of the currencies that you need to hold offshore, the possible returns that might be achieved, the fees charged by banks, investment advisors and trustees, as well as any taxes associated with the different options. These need to be taken into account before any initial decisions are made and then, once invested, they must be managed and reviewed as part of an ongoing process, warns Van der Merwe.
In some cases, fees can end up being significant drain on your wealth – to the point where they eat into capital as well as income. And if an investment is held in the name of a company, trust or pension, there will be additional directors’ or trustee’s fees on top of the advisory fees. Investors in some European jurisdictions often pay significantly more in fees with no added benefits, compared to investors in countries like Mauritius. That being said, some clients do not mind paying more to set up a trust in a ‘gold-plated’ trust jurisdiction like Guernsey, provided that they are aware of what they are paying for and the return on their investment justifies the higher fees.
Another factor to consider is tax. Holding overseas assets in inefficient structures is a sure-fire way of depriving investors of value. Make sure you understand how best to fund your offshore structure before any investments are made. An interest free loan to an offshore trust is not a good idea for example. The loan needs to be interest bearing and a market related interest rate should be applied. Should you already have a structure offshore, it is worth considering an independent review by a South African tax expert to ensure that it is still tax compliant in view of recent changes in South African legislation, says Van der Merwe.
The decision to invest wealth overseas (personally or by making use of offshore structures) is a sound one, but there are pitfalls for the unwary investor. These include South African exchange control rules, cost considerations and often less flexibility (when working through trustees or investing through pension plans). ‘These issues must be taken into account and fully appreciated,” says Van der Merwe. “That’s why anyone looking to establish an offshore asset base should use a reputable investment and trust company to assist, and get appropriate investment, tax and legal advice from the start.”