Should I move all my assets offshore?

Feel free to reach out to PSG Wealth Manager Morné Oosthuizen directly.

Media articles often provide detailed options for investors to safeguard against the possibility of a failed state in South Africa. Sometimes readers perceive these options as recommendations and in a panicked state attempt to expatriate all their assets and investments. Always remember that these articles typically focus on a doomsday scenario. There are many of these scenarios around on especially social media, and you cannot base your future financial security on  often exaggerated portrayals of risks. As advisers and investors, we have to concentrate on what we can control, and focus on managing risks rather than gamble on one specific outcome.

I would like to focus on three key suggestions that have been bandied about in media articles as ways to safeguard your assets. As an initial comment, I want to make it clear that every individual in South Africa needs to consider their own situation by looking at their personal balance sheet, and current and future objectives and goals. There is no ‘one size fits all’ answer to the question of how to construct your investments or which portion of your assets should be moved offshore.

The first issue I wish to address, is to sell your residential and investment properties. Although residential property outside the Western Cape in general has not shown a lot of capital growth over the last decade, I do believe it is extremely important to take into account the costs and taxes on selling your properties. These costs will reduce the overall value of your balance sheet, and you will also add an additional expense in renting a new property in which to live. In addition, renting out a  property can be an effective way to supplement income with consistent and reliable rental streams. If you have held these properties for a significant period of time, also remember that the full profit on sale will be included for capital gains tax purposes.  If you then proceed to invest all these proceeds in cash (local or offshore), you will basically guarantee that your capital will decrease in real terms as cash will seldom beat inflation on an after-tax basis .

The second issue worth discussing is the option to cease contributions to your retirement annuities. For the majority of South Africans, their retirement funds together with their primary residence will form the majority of their balance sheet at retirement. It is worth to note that 6% of South Africans can afford to retire. It is also concerning that on average, South Africans tend to receive 31% or more of their last salary before retirement as a retirement income. For most of us, this would already be a massive step back in lifestyle after retirement. My recommendation to any investor is to optimise your contribution to your pension/provident or retirement annuity fund. You can contribute 27.5% of your taxable income, up to a maximum of R350 000 p.a. and deduct these contributions from your taxable income. This effectively means that SARS is contributing up to 45% of the premium of your retirement funds. Just as important as the contributions, will be to manage the underlying investment in your retirement annuity. Recent changes to Regulation 28 of the Pension Funds Act mean you are now allowed to have 45% offshore exposure in your retirement fund. I would recommend that you optimise that allocation. Too many investors start a retirement annuity, and then never revisit the underlying investments. That approach is the same as planting a new plant in your garden, and not watering it. For anything to grow, you need to give it the attention it deserves.

In addition you should also optimise your R36 000 a year contribution (to a lifetime limit of R500 000) to your tax free investment. Remember that there is no tax deduction for these contributions, but you do earn growth and income free of any taxes.   

The last issue I want to address is to move your discretionary investments offshore in entirety. Many investors have investments that have been growing for many years, and the capital gains tax impact can be massive. As an example, I saw a client recently whose cost price on his Naspers shares was R3,25. The share price at time of writing this article is R3 117,45! The impact of just selling would be that effectively we will pay 18% capital gains tax on the full proceeds of this transaction. I would suggest that a detailed analysis is done by an investment professional on not only your investment portfolio, but your total balance sheet and the overall asset allocation. If the conclusion of the analysis is that your portfolio is overweight South African assets, a plan must be put in place about how to increase your offshore exposure. This personalised plan must take into account any possible costs and taxes in making the changes. By doing this rebalancing over a number of years, you can optimise the annual tax concessions allowed by SARS. Various offshore structures and investment vehicles should also be considered. Making use of annual offshore allowances would also be advisable.

The most important principle for any investor is to avoid making emotional decisions at all costs. Many of us are despondent about the deterioration of our beautiful country over the last decade. We are all experiencing negative emotions due to loadshedding, rising inflation and interest rates, corruption, potholes, questionable policy decisions by the government, failing state-owned enterprises, and the list goes on. However, to have knee-jerk reactions based on emotions can be extremely costly and detrimental to your long term financial well being.