Sometimes the desire to invest offshore is as simple and compelling as ‘anywhere but here’, but if you step back from the emotion, there are many other considerations to help you optimise this step…
In the previous iteration of this series, we started to talk about offshore investments, and you’ve probably gathered that this is not as simple as it seems. Here are some questions you need to explore before sending your funds off into the void…
What is the investment time frame? For Saffers looking for offshore exposure, this should be long-term (at least 5 years), for retirement or a legacy (after you pass) where volatility is a secondary concern.
Are those offshore funds going to be needed soon? To avoid volatility and excessive fees, you should probably repatriate the funds only once a year. If you want to optimise this, consider having some flexibility on the exact date and get your advisor/asset manager to ‘lock in’ a good exchange rate by converting the dollars (say) into ZAR while still offshore – only really available if you’re using a flexible bank/investment platform.
Is capital preservation important? If so, it is best to keep in currency, even if it earns no interest. You could venture into bonds, but this has also been volatile recently. There are always the currency cross fluctuations to consider.
Are you expecting this investment to produce an income? The yields found offshore are far lower than we get in RSA. For RSA residents the biggest value comes in the growth stocks, not really in the yields.
Does the platform have traditional banking facilities, or is it just investment? This reduces the flexibility and availability of the funds. On liquidation, they must pay out into a bank account – what if you don’t have one offshore?
Is the investment going to be tied up for 5 years for an endowment, for example? Read the small print; they may use another phrase – look for ‘term’. Again, watch out for upfront fees.
Is it going to require a probate officer on your passing? This is common in many European Countries and the Channel Islands, and it can add an additional cost and time delay.
Should you have a joint account with your spouse? This can speed up the process in an estate. Properly structured (with banking facilities) this can also be a source of quick liquidity for a spouse.
Are you maximising your tax and exchanging control allowances with your spouse?
Is the asset allocation (cash, bonds, property, equity) and portfolio diversification balanced across your entire (global) portfolio? There is a temptation to set up investments in a siloed way instead of looking at them holistically across all asset classes. These ratios will change depending on the location (onshore or offshore), risk appetite, pre- or post-retirement, required income at retirement, interest rates, yield trends and other variables.
Direct offshore vs asset swap (rand-denominated feeder funds). Remember that “Feeder funds” or offshore, rand-denominated funds use the platform’s institutional allowance rather than yours, avoiding offshore estate complications and are simpler to access, at the cost of the money staying in the SA system. These funds are a good place to start.
Be aware of tax on the way out and while invested. SA residents are taxed on worldwide income and gains, and currency movements affect the CGT calculation. Keep records of the rand base cost on each transfer. This is an ideal entry for your RedFile organisational system (still free on request), and difficult for an estate administrator to re-create.
If you missed it in the last post, estate duty in the investment’s country is a major consideration. US-situs assets (for example, US shares held directly) can trigger US estate tax for non-US persons above a low threshold.
Currency choice. It may make sense to match the currency you invest in or hold to future liabilities: children studying or living abroad, retirement plans, or future travel; this applies more to interest-yielding investments.
Retirement funds have offshore limits. Readers with RAs and preservation funds are already partly offshore (Rand-denominated funds) under Regulation 28’s 45% limit, so factor this into your overall offshore exposure.
Jurisdiction and investor protection. Where is the platform regulated, and what happens if it fails? At Rexsolom we spend a lot of time weighing up the pros and cons of the various jurisdictions, platforms and products before settling on our current offering in Switzerland.
Remember that there is a cost of moving your funds offshore and repatriating them; then there are all the other fees that I have spoken about at length elsewhere in this series. FX spreads on the way out and back, platform fees, fund fees, and advice fees, compared as one number.
