International retirement plans and pensions: A great way to hold offshore assets

By: Leah Mannie, Pensions and Business Development Manager, Sovereign Group

Leah Mannie

Investing offshore has shifted and transformed over the years, presenting opportunities to assist individuals with their offshore objectives. South Africans are increasingly looking for secure and efficient investment structures, for various reasons, as well as for methods to preserve their wealth.

The reasons for offshore investment include making use of hard currency to hedge against the rand, with legacy planning being another key aspect. Investing through reputable offshore retirement vehicles enables individuals to create financial strategies for their legacies and not be limited with investment options, which aids with diversification.

While South Africans are resilient, we cannot faithfully say the same about our economy at this stage. Looking particularly at offshore retirement planning, it makes use of beneficial regulatory and tax-neutral jurisdictions. Largely international retirement plans offer financial freedom in the sense that a member of the plan can freely buy and sell assets within the structure without triggering capital gains tax within the plan.

However, there is no one-size-fits-all situation when investing offshore. Regulated and licenced offshore pensions and retirement plans can provide secure investment opportunities, and transferring or contributing part of your wealth offshore does not need to be daunting, if you work with advisers and consultants who understand your financial goals and are abreast with what is taking place in South Africa and are able to recommend suitable options.

Offshore pension and retirement plans have different defining features, the first being controlled access to the funds. This is arguably the most important feature that pensions and retirement plans can have, and include the implementation of a minimum retirement age. The purpose of any pension or retirement plan is to support the member in their retirement. As such, a plan should pay benefits out when the member is of the age determined by the applicable legislation, and payments can only be transferred to the main member. Payments to third parties are not allowed.

The minimum age to request a benefit from an international retirement plan is 50, and this can be deferred until the age of 75. By the of age of 75, members should be utilising their plan and taking a benefit. The amount that a member requests will be paid from the capital amount as a return of the capital that is initially contributed to the plan. This can be any amount that the member wishes to tap into, and the remainder can remain invested.

An important factor relating to contributions is for the trustees to implement a maximum age for establishing a new plan and allowing further contributions for existing members. Therefore, the age for some retirement plans is 75. The main reason for applying a maximum age is to ensure that the retirement plan is being utilised correctly. Establishing a retirement plan later than 75 would require a detailed rationale as, by this age, it is typically expected that a person would already have retirement planning in place.

Another feature to consider is the contribution of funds that are already taxed and cleared, and which are held offshore. Assets that are already in an offshore bank account or held in a direct investment vehicle such as an investment platform, discretionary fund manager, share portfolio, or the like, can be utilised to fund an international retirement plan. Trustees can review the investments held within this direct investment, to allow in-specie transfers.

With legacy planning being one of the key considerations for offshore planning, there are various options that can be beneficial. The main member can request, on his death, for the beneficiaries to receive a rollover of both capital and capital gains from his retirement plan to another retirement plan for individual beneficiaries, or for a discretionary trust to be established for multiple beneficiaries.

Although these plans have ancillary tax benefits, they should not be the sole purpose of offshore retirement planning. Investors will also benefit from portfolio diversification, portability, and the financial security that comes with investing in jurisdictions that are both politically and economically stable. Holding assets in stronger currencies reduces risk, and it is also beneficial to make use of well-regulated jurisdictions that have measures in place to combat fraud and money laundering.

Mannie emphasises that offshore retirement plans are subject to strict, often jurisdiction-specific, regulatory requirements. Trustees and administrators are obliged to take all reasonable steps to ensure that the interests of members are protected. Holistically, it is fundamental that retirement plans and pensions have retirement rules and guidelines that offer protection. Everyone has a responsibility to support themselves and protect their legacy. Investing part of your wealth offshore opens possibilities and creates opportunities beyond our borders for preserving

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