Investing Offshore

July is National Savings Month in South Africa, which is an awareness campaign spearheaded by the South African Savings Institute (SASI). The objectives of the campaign are to promote discussion about saving, raise awareness about the benefits of financial planning, and motivate consumers to be proactive with regards to their savings.

The country’s weakened currency continues to affect the price of everyday items, such as fuel and basic goods, as well as more luxury expenditure, such as vehicles and international travel.

Given that the nation’s economy is in the doldrums, it is advisable for South Africans to hedge against currency depreciation, as much of our expenditure is priced in developed-market currencies. Consequently, many citizens are thinking about allocating some of their savings to international currencies, such as the British Pound or US Dollar.

Not only does this protect assets from the Rand’s wild volatility, but it also makes international travel more accessible and predictable.

You are allowed to move a maximum of ZAR1-million offshore each year without tax clearance from SARS, and a maximum of ZAR10-million with tax clearance. The ZAR1-million would, however, need to be registered with the Reserve Bank, so you would have to make the transaction through an authorised dealer (most South African banks are authorised dealers).

Here is a brief overview of your main options when it comes to offshore investments.

1. Invest in Rand-denominated investment options

A Rand-denominated investment is one in which your investment and currency exposure is foreign, but your money does not physically leave South Africa. Your investment is, therefore, made in Rands and paid out in Rands.
Contributions to a pension fund or retirement annuity can give you offshore exposure in your underlying investment choice, as pension fund regulations stipulate that up to a quarter of your capital can be invested offshore.

Additionally, most asset managers in South Africa offer offshore unit trust funds, which are priced in Rands, although your capital is invested offshore. Not only will this give you global diversification and foreign currency exposure, but you also won’t need tax clearance to invest in these funds, and the minimum lump sum requirements are much lower than for other offshore investment options. If you don’t have much money to invest, you can always save in this vehicle until you reach the minimum requirements for alternative options of moving your capital offshore.

If you have a stock broking account, you also have the option to redirect some of your capital to exchange traded funds (ETF) that invest offshore. Again, these allow you to invest in Rands and be paid out in Rands.

2. Physically take your money offshore

This ultimately involves going through the exchange control process, opening up an offshore bank account, and sending South African Rand abroad to be converted into your chosen currency. By actually moving your capital offshore, you will never be forced to repatriate or convert the investment back into Rands.

Once the money is offshore, you can do with it what you want (within legal boundaries). You could leave it in your bank account, or alternatively choose to invest it in unit trust funds or stocks.

Do be aware that any investments offshore will still form part of your estate, so you will be liable for estate duty in the jurisdiction in which you invest. However, certain South African investment providers offer offshore endowments that eliminate the need for an offshore executor or probate. You can nominate your beneficiaries and, after your death, your investment can either continue offshore or be paid out in the foreign currency to them. Both of these options can happen separately from the estate process. There are also some beneficial tax advantages of using an endowment structure, as CGT will be paid at a lower rate and calculated using the offshore currency.

However, this type of investment would require a five-year initial commitment period, as well as quite a large minimum lump sum (circa US$20,000+), and quite a lot of onerous paperwork. It has also been argued that it is not necessarily good for South Africans to take their money out of the country, as an emotionally-charged mass reaction, which involves physically moving assets out of South Africa, could do even more harm to the economy.

3. Open an offshore savings account

Some experts advise that South Africans should turn to offshore investing, which allows you to invest in international currencies via online banking, without actually taking your money out of South Africa.

A foreign currency investment account allows you to quickly and conveniently put some of your savings into a foreign currency, while offering the freedom and flexibility to easily access your money online and move it back into Rands when you so wish.

It is free to open and maintain an account, but transactions are ZAR75, which covers the exchange control checks that are required by the Reserve Bank.

For many investors around the world, investing offshore is often a means of achieving global diversification, accessing stronger economies and alternative industries, as well as being exposed to different interest rate and inflation regimes. However, South Africans have arguably more to consider when it comes to structuring their finances, such as the nation’s political and economic stability.

There are several factors to take into account when looking to invest offshore, and your decisions may depend on your main concerns. Whatever these may be, it is advisable to consider investing part of your portfolio offshore in some capacity, so don’t hesitate to arrange a meeting if you would like to discuss your options further.

Posted in Blog.