How do I retire comfortably, and maintain the lifestyle I’ve become accustomed to? That’s the question many of us ask ourselves at some point – and there’s no single right answer. Everyone has their own circumstances and goals.
Lately, though, we’re seeing three emerging trends in financial planning. One is a clear shift towards family and legacy planning. Call it the impact of Covid-19, if you will, but growing numbers of individuals are considering family within their retirement planning. People want to leave a safety net for their dependents and loved ones.
Another trend is that people are starting to plan their futures earlier. Fact is, planning for retirement is not only for the middle-aged anymore.
Also, some individuals are looking beyond the usual array of local retirement plans to offshore international pension options. Local pensions have their place in a portfolio, but they have limitations that international options can cover. That’s why many investors are investing in the global market for growth purposes and saving offshore for retirement with legacy planning options.
There are several good reasons for this. For one, international retirement plans have no limitation to equity exposure, which means they can invest in a range of global funds. Local pensions only allow up to 30% of global fund selection.
Secondly, international plans are not restricted by the location of the investments. They are typically in hard currency (such as the Pound, USD or Euro), which are less volatile than the Rand.
Thirdly, international pensions are more flexible. The retirement age can be anywhere between the age of 50 and 75, and members can draw down ad-hoc amounts that suit their specific needs, with no constraints around the amount of cash that can be withdrawn or the need to purchase an annuity. This allows the funds to remain in equity investments even when the member is in drawdown.
Fourthly, and importantly, international pension fund members can draw down from their contributed capital, which means they don’t trigger capital gains tax. Members only pay capital gains tax in South Africa when they draw from the capital gains component. This allows for tax free growth within the international pension. Capital gains is only tapped into once the capital component has been depleted, and every time a member contributes, they increase the capital amount.
Fifth, a member of an international pension may appoint discretionary beneficiaries, which allows legacy planning. On death, the assets would be passed into a trust or international pension plan, which would provide for the beneficiaries – usually the member’s spouse and children. This option offers asset protection beyond the death of the member, instead of returning the funds to South Africa. The payment of death benefits will not trigger a capital gains or income tax charge when the transfer takes place. The gains accumulated thereafter will be taxable when distributed to the beneficiaries.
Six, and a growing consideration, is the portability of the pension if a taxpayer emigrates. International pensions are completely portable, whereas local retirement annuities and pension funds are not. A financially immigrated individual will have to prove they have been non-tax resident in South Africa for three full consecutive years before they can move their SA pensions or RAs out of the country.
By using a combination of the annual foreign investment allowance and annual discretionary allowance, the SA Revenue Service and the Reserve Bank allow South African investors to invest up to R11 million per taxpayer per year offshore. The funds will always be net of tax, being used for further pension and retirement planning with beneficial factors to enhance your entire retirement portfolio, as it will consist of a mixture of your current local pension/s and the addition of your international pension plan.
Lastly, look at retirement planning with diversification in mind for pension provision and legacy planning alternatives. Also, ask the right questions to ensure the trustee is administering the international pension plan in line with pension regulations. Ultimately, international pension plans are designed for retirement purposes, and the trustees will have to administer them in accordance with pension provision regulations.