To protect your retirement funds, look offshore

South Africa faces a long, hard road to economic recovery, with the combination of massive unemployment, huge additional debts incurred as a result of Covid-19 and constrained government spending meaning that it will take years just to get back to pre-Covid GDP levels.

That’s the prognosis of political analyst Daniel Silke, who says that while 2021 was supposed to be an economic recovery year for South Africa after the lows of 2020, the uptick has been muted, with ongoing political disruption adding to the uncertainty.

Speaking at Sovereign Trust’s annual retirement seminar this month, Silke said the rest of the world was starting to claw its way back to pre-pandemic GDP levels, with a ‘K-shaped’ recovery starting to emerge and with investors and professionals recovering well. However, the people and countries that were suffering from job insecurity were still struggling.

What this means is that it has never been more important than now to consider future financial sustainability when it comes to retirement planning, said Sovereign Trust (SA) Limited chairman Tim Mertens.

“The unprecedented economic downturn has raised questions around investment performance, financial resilience, and supervision of retirement and investment funds. It’s critical for South Africans to consider offshore investment options to protect themselves from a volatile economic and political environment,” said Mertens.

However, recent significant changes to tax compliance requirements and the ability to encash retirement funds means that any member of a pension fund or retirement plan must plan their emigration carefully, with a view to how they will need to adapt once they attain tax residency in their new home country.

Tim Powell, the director of Sable International, said the shift from the previous focus on financial emigration to the current tax emigration regime was having an impact on the ability of individuals to move money out of the country, in particular accessing their retirement funds and inheritances. Previously, expats could withdraw their retirement funds before their retirement age as long as they had financially emigrated. Since 1 March 2021, they now need to prove they have changed their tax status with SARS to non-resident as well as demonstrate that they have been tax resident in a foreign jurisdiction for at least three consecutive tax years before they can access retirement funds.

Tax emigration and the resulting SARS’ deemed capital gains tax – the so-called ‘exit tax’ – could also provide potential liquidity challenges to people suddenly having to pay capital gains taxes on existing worldwide assets.

“Ending your tax residency in South Africa is not just a simple tick-box exercise, and it’s critical that those planning to emigrate and move their investments should obtain a professional assessment of their personal circumstances, specifically considering issues like investment allowances, tax clearance applications for foreign investment, and maintaining bank accounts in SA,” said Powell.

Despite the added tax complexities, however, offshore retirement planning remains the best option to ensure the stability and sustainability of retirement funds, said Richard Neal, MD of Sovereign Trust (SA) Limited. International retirement plans are not in breach of general anti-avoidance rules (GAAR), as long as they are recognised as bona fide pension schemes, and are administered and run in a proper manner.

Offshore retirement funds, like those falling under Guernsey’s 40(ee) regulations, provide several advantages over South Africa-based funds. Guernsey 40(ee) schemes are tax exempt for non-residents, and allow contributions in a range of forms. However, the major differences come in with how the investments are made and how benefits are drawn: there are no geographic or other restrictions on investments, and members can take benefits as and how they prefer after the age of 50.

Sovereign’s own 40ee plan – branded as the Conservo International Retirement Plan – is an effective estate planning and diversification tool that can be specifically tailored to the needs of South Africans. Unlike traditional pension schemes, there is no centralised ‘pot’ of funds, with members’ retirement funds held solely for their own benefit.

“Retirement planning is never a ‘one size fits all’ situation. It all depends on the specific circumstances and retirement goals of each person. But forward planning pays off, especially at this time,” said Neal.