Some musings on international retirement plans
There are a growing number of high net worth (HNW) South Africans that hold dual citizenships and can choose from more than one country to retire in. This reality is a real challenge to locally based financial advisers who are not always up to speed on the myriad financial, regulatory and tax considerations that go hand-in-hand with an international retirement plan. David Noon, commercial director for South Africa at Capital International Group, used the 2022 Sovereign Wealth International Retirement Seminar to share some of his views on the subject, in a presentation titled ‘Navigating the windy road to [an international] retirement’.
Knowledge of tax dispensations non-negotiable
Noon singled out the regulatory environment and economic and political stability as critical considerations when choosing where to ‘domicile’ an international retirement plan. Other important considerations include having access to global financial markets, diversifying investments across asset classes and currencies and ensuring tax neutrality, to the extent possible. “You do not want to pay any unnecessary tax by way of double taxation, withholding tax or whatever other mechanism,” he said.
Financial advisers must ensure that their clients’ financial plans deliver on their financial aspirations, regardless of where they plan to retire. To do so requires answering questions such as: How much capital is needed to support the client’s retirement; when does the client intend retiring; and where does the client intend retiring, among others. “The first of these questions is probably the hardest to answer, because the goal posts keep shifting [as your client’s navigate their life journeys],” said Noon. He pointed out that the amount required in retirement, and the time taken to accumulate that sum, varied with significant life events, such as having additional children and / or putting those children through school and university. It is also worth noting that where your client chooses to retire could have a significant influence on the answers to ‘how much’ and ‘when’.
Being ‘stuck’ between two countries…
Clients who are stuck between two potential retirement locations introduce a number of challenges for financial advisers. “The retirement plan needs to be flexible to accommodate life and regulatory changes; your clients need to have choices and options,” said Noon. He suggested that the long and windy ‘life stages’ road to a sustainable retirement has not changed much over 25 years. These include early life, when your clients complete their education, start their first job and gain a taste for financial independence; accumulation and growth, during which your clients set about accumulating assets and saving for various financial goals and objectives, including retirement; transitioning into retirement; and finally, estate planning.
Financial advisers or planners who advise clients with international retirement aspirations need to partner with providers that operate in multiple currencies, can give your clients cost-effective access to multiple asset classes, globally; and are capable of global tax reporting. Having suggested Capital International Group as competent partner in each of these areas, Noon steered the discussion to a more immediate and real threat to cross-border financial transactions, namely South Africa’s looming Day of Judgement with the Financial Action Task Force (FATF). Last October, the FATF gave National Treasury (NT) an ultimatum to address weaknesses in South Africa’s anti-money laundering (AML) and countering of financial terrorism (CFT) framework, or risk being grey listed. Being grey listed, which looks increasingly likely, could introduce untold difficulties for HNW clients.
What the FATF now?
“Nobody talked about the FATF report when it appears in October 2021,” said Noon. “At the time NT issued a one-page statement saying they were dealing with the matter, and we should not worry”. Noon said it was almost inevitable that South Africa would make its way onto the grey list, despite the last-ditch end-August 2022 effort by the NT to ram through amendments to the Financial Intelligence Centre Act, the Non-profit Organisations Act, the Trust Property Control Act, the Companies Act and the Financial Sector Regulations Act.
“Come October 2022, South Africa as a jurisdiction could have been grey listed for AML and CFT purposes, [meaning it will] have to undergo a programme of reform overseen by the FATF within an agreed timeframe,” said Capital International Group’s Chief Risk and Compliance Officer, Kath Quayle, in a pre-recorded video. She added that the home affairs departments in many offshore jurisdictions “would undoubtedly put South Africa onto the list of jurisdictions that are perceived to present a higher risk of money laundering and terrorist financing”. And that would mean closer scrutiny of virtually all financial transactions.
The good news, according to Quayle, is that the potential impact of a FATF grey listing can be mitigated. “We will aim to deliver as little disruption to our client base as possible; South Africa is such an important marketplace to us [and] our appetite towards doing business with and in South Africa is unchanged and will remain unchanged,” she said. “We should be able to mitigate and manage those risk factors [meaning that] in a substantial proportion of cases the grey listing of South Africa would not really cause many of our clients to become higher risk”. Quayle added that the firm would partner with its South Africa based intermediaries to support them in ensuring that they and their clients can continue to seamlessly access the firm’s capital services and platforms These views were given in the context of financial entities licensed in the Isle of Man.
The sad consequences of grey listing
Of course, there are many other impacts to consider. Noon closed the discussion by suggesting that grey listing could result in a decline in foreign investment into South Africa, which might have an impact on the rand. “You can also expect far greater friction when you open accounts with overseas institutions on behalf of your clients,” he said, adding that it was common practice for global financial institutions to simply walk away when a country presented higher risk or compliance became too onerous.
Financial advisers and wealth managers may be severely impacted, with a flood of requests for audited accounts; source of funds; and payslips, to name a few. The one saving grace is that there are solution providers that follow the mantra: “there is nothing wrong with being a good person in a bad place, which is what South Africa will be perceived to be”.
Writer’s thoughts:
The ease with which funds can flow between local and offshore financial institutions introduces a range of anti-money laundering (AML) and countering of financial terrorism (CFT) concerns, with regulators introducing various checks and balances to mitigate the risk. Sadly, it often seems as if ‘clean’ clients are subject to more scrutiny than the criminal kingpins. Agree or disagree? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
