Six Reasons Why You Should Live in South Africa but Invest Offshore
By Mike Fannin
South Africa, the Brave
If you have been a resident of South Africa for longer than a minute, you don’t need me to tell you about our beautiful country’s challenges. Power (of the electrical sort), crime, the diminishing rand value and increased inflation, to name a few, are uppermost on people’s minds when it comes to South Africa.
As a result, many have opted to leave the country (and return – see the blog on Happy Homecoming), or simply bury their heads in the sand and hope it goes away. The rest of us know better because we read articles like this one.
Having travelled and lived in many cities and countries around the world, I can assure you that South Africa has more going for it than you might think. For one, the South African culture, over and above our wonderfully diverse tribes and languages, is one of the biggest resources this country has: resilient as iron, rich with optimism, creative and inventive, quick to laugh, and always ‘bok for sport’. Mix that with great weather and beautiful wide open spaces and we have more than enough reason to stay.
The bottom line is there are certain things we have control over, and things we have no control over. I cannot control what our government does, but I have control over whether I vote for the leadership I want or not. I cannot choose when load shedding happens, but I can choose where I live and where my kids go to school. I cannot predict the future but I have the freedom and benefit of being able to choose where I invest my money.
Back in 1997 the maximum amount we could take out of the country was limited to R750k per person or a lifetime allowance, but now we are in the very positive position of being able to move R10 million out of the country per year.
This recent change has opened a whole spectrum of choices for many individuals who have money available to invest.
The bad news is, South Africa’s currency is not getting stronger and, in fact, our investments are losing value every second they remain locked into the Rand. The good news is money can live anywhere, and work hard for us, while we stay here and enjoy breath-taking sunsets while sipping Amarula at our favourite game farm.
Six Good Reasons Why You Should Invest Offshore but Still Live in South Africa
- Retire Anywhere: South Africans love to travel, and we often work hard throughout our adult lives just so that we can enjoy travelling in our retired years. With the current exchange rate, our hard-earned retirement is not going to last very long overseas. With money invested for a retirement offshore, we have full access to our pension in a stronger currency, in the country of your choice, with favourable tax implications. Regulation 28 of the Pension Funds Act of 2011 allows for local retirement funds to invest up to 25% of their portfolio outside of South Africa – this means only a quarter of your investment will be in another currency. It makes sense to rather invest a higher proportion of it in a retirement entity housed offshore and have 100% access to your portfolio when you retire.
- All of Your Eggs in Many Baskets: From a broad holistic financial planning point of view, diversifying your investments is best. It’s never wise to keep all your eggs in one basket. South Africa is 1% of the global financial markets. Adequate diversification is a standard feature of normal investment strategy and becomes important when you realise just how small and fragile the South African economy is. Countries that had bigger economies that failed were Ireland, Argentina, Russia and most recently Greece. Therefore putting all your eggs in one basket can have catastrophic consequences. It’s wise to diversify:
- – Invest in different asset classes: cash, equities, bonds, and property commodities. There are far more funds and stocks available internationally than there are locally. Exposure to major international shares such as Apple, Coca Cola, Microsoft, etc. provides a sturdy cornerstone to any well diversified portfolio.
- – Invest in different currencies: Rand, dollars, pound, and euro-based investments.
- Exchange Rate: Twenty years ago the exchange rate was R5 to the pound. Now it is R20 to the pound. If you invest offshore, your money is not exposed to the currency fluctuations we currently experience in South Africa, which means a stable, predictable upwards growth in the long run. The long term trend for the exchange rate is downward, and there appears to be no end in sight. If the currency falls at 7% a year, the buying power halves every 10 years. Coupled with inflation running at 7-8%, you have a real chance of buying power halving every five years, a horrific scenario. Keeping your money in hard currency mitigates this problem to a large extent, meaning that your grocery trolley stays full as your buying power stays the same.
- Favourable Tax: You can choose which tax jurisdiction your investment is in so that, when you withdraw for your retirement, you are favourably taxed. South African retirement annuities are notoriously heavily taxed; with offshore entities you can mitigate some of the tax implications your investment will be subject to.
- Stock Exchange: The South African stock market has underperformed when compared to major emerging market indices. While it has given fairly good annual gains, it pales in comparison to some of the other emerging market indices, which means your money will work much harder for you in another market.
- Political risk. Unfortunately, this has become an increasingly prevalent concern and needs to be factored into your financial decision-making process. As the South African political scenario develops, the chance of an event that could have critical impact on local investment portfolios seems ever more likely. Moving your investments to market safe havens is something that should be considered.
Hopefully these six reasons will help you start a conversation with your financial advisor about your retirement planning and annuity.
It’s time to kick your investment out of the nest, send it overseas, and watch it mature.
About Mike Fannin:
Mike Fannin is the Group Sales Director for Carrick Wealth and a leading mind in financial management. He is an expert in designing tax efficient solutions for high net worth clients, and is dedicated to the craft of creating sustainable retirement solutions. His expertise has been honed over the course of 12 years in the crucible of London’s financial district. There he co-founded and built Principia Group – a holistic Financial Services company that incorporated Financial Advice, Mortgage procurement, Corporate Finance, Venture Capital, Tax and Estate Planning divisions.
When Mike is not helping his clients amass more wealth, he enjoys pushing his physical limits in Ironman South Africa multisport endurance challenges.
— Carrick Wealth (@CarrickWealth) July 30, 2015