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Offshore investing may sound like something only jet-setting millionaires can do, but the truth is that it’s far more accessible than it seems. In fact, the opportunities and potential rewards far outweigh any fears you may have about sending your rands out into the big, wide world. Here’s what you need to know if you’re just starting out with offshore investments.
Why would I invest offshore?
There’s a whole wide world out there. Not investing offshore limits you to the South African market, which makes up barely 1% of the global market. In other words, you’re missing out on 99% of the opportunities to grow your money!
When you include offshore strategies in your savings and investment plans, you spread your risk and protect yourself against local market wobbles and exchange rate volatility. You also give yourself a far greater chance of a balanced, diversified portfolio with access to better interest rates, stronger economies and different industries. That’s why foreigners invest in South Africa, and why South Africans should invest overseas.
What are the red flags?
Investing offshore is still investing, so you need to have an idea of what you’re doing. For example, investing in developed market economies may come with lower risks, but you might not find the growth or returns you’re hoping for. The opposite is true for developing market economies: they promise better growth, but with higher risk.
Then there’s the element of the unknown: each offshore market comes with its own set of intricacies and complications, so – as with any investment – it pays to do your homework.
How does investing offshore work?
South Africans have two options when it comes to offshore investments: direct or indirect. Direct investing is when you take your money overseas, going through exchange controls, opening a bank account in a foreign country, and sending your rands to become anything from dollars and pounds to yen and euros. (Or you could just use Shyft to send money offshore.)
If you have a SARS tax clearance certificate, you’re legally allowed to send up to R10 million a year to your offshore bank account. Without that tax clearance, you’re limited to a Single Discretionary Allowance (SDA) of R1 million a year.
Indirect investing means that even though you have foreign currency exposure, you invest in rands, your returns are in rands and your money never actually leaves South Africa. The paperwork is easier, as you don’t need a tax clearance certificate.
What are my options?
You literally have a whole world of opportunities when you go the offshore route. Standard Bank’s Shyft platform makes direct investment super easy, allowing you to buy forex to invest offshore. Soon the new investment functionality will enable you to buy (and sell) shares in global companies like China’s Alibaba and Baidu.com, or US-based companies like Apple, Amazon, Alphabet and more. As long as you stay within that SDA limit of R1 million per year, you’re good to buy as much as you like.
Then there are offshore unit trust funds, which are priced in rands but the capital is invested offshore, giving you the foreign currency exposure and global diversification.
Exchange Trade Funds (ETFs) are another option, great for if you prefer to buy shares in a bit of everything. ETFs track stock exchange indices like the NASDAQ 100 or the S&P 500, providing good balance and diversification. If it’s a foreign rand-denominated fund, you’ll invest in rands and be paid out in rands, but you’ll get the same exposure as if you’d sent your money overseas.
What about my retirement fund?
The truth is, if you’re already contributing to a retirement annuity (RA), the chances are that you already have offshore exposure in your underlying investment choice. But if you’re thinking about moving all of your retirement savings into offshore investments, think again. Regulation 28 of the Pension Funds Act places a limit on the exposure of various asset classes in your retirement fund. In terms of Reg 28 (as financial folks like to call it), your retirement fund is only allowed to invest 75% in equities, 25% in listed properties, 10% in hedge funds and – here’s the important part – 30% in offshore assets.
How does the tax work?
SARS has a far reach, so even if you’ve sent your money overseas you’ll still have to pay tax on it. South African tax residents are required to pay tax in South Africa on their worldwide income. That means you’ll pay tax interest and dividends earned from offshore investments, on interest earned on interest-bearing offshore investments or offshore bank deposits, and of course you’ll face capital gains tax if you sell or withdraw part of your foreign currency-based investment.
There are some exceptions and exemptions, but the bottom line is that you need to factor taxes (and, of course, investment management fees) into your calculations when you consider sending money overseas.
Where do I start?
Investing offshore may sound exotic (and even a bit intimidating), but it’s easier now than it’s ever been. You could start by speaking to a financial adviser or to your bank about your options. If you’re a global citizen who likes to be in control of your own destiny, you do have other options. A platform like Shyft, for example, makes it very easy to convert rands into foreign currency, to play the forex market, and to invest in offshore ETFs and international listed companies.