Investing directly offshore has gained popularity in the past decade, as investors started looking for the superior returns offered by international markets against the backdrop of a struggling local economy. Many tried to invest directly offshore and had a bad experience doing so thanks to either fees, taxes or estate problems lingering in the back of their minds.
Globalization has changed many things in our world, including the way we invest. Offshore investing has also become much more accessible than in the past. Nowadays an offshore account can be opened in one or two days which allows for investing in anything money can buy. BUT this may come at a much bigger price than what one might have bargained for.
When investing directly offshore it is important to not only know South Africa’s regulations regarding taxes and estate duty, but also the regulations and taxes of the country you are holding your share/portfolio/investment in.
Red flags to note when investing offshore:
In the UK this is known as inheritance tax, in the US it is called estate tax. Collectively, it is known as “situs tax.”
If you own assets upon death in the UK of an amount over 325 000GBP, 40% situs tax will be levied on situs assets over the value 325 000GBP.
In the US Situs is triggered at a dangerously low threshold of only $60 000.
These are payable even before SA estate duty comes into play.
Grant of Probate
This can simply be described as a type of offshore executor of your offshore assets that you would need to appoint to specifically manage all your assets outside of SA. Effectively accruing more fees upon death.
An experienced, qualified financial advisor can guide investors through this process. They continuously research ways to invest individuals’ money the best way possible, taking into consideration the present and future risks and regulatory hurdles an investor would face.
One structure that is not only affordable, tax-friendly, easily inheritable and liquid, and widely regarded as the holy grail for investment structures offshore is an International Endowment Option. It offers significant benefits regarding all the challenges mentioned:
Investments and withdrawals can be made in USD/EUR/GBP/ZAR.
There is no VAT (currently at 15% in SA) on investment management or administration fees as the structure is set up in Guernsey.
At Brenthurst Wealth we invest in global roll-up funds, which means all dividends and interest earned gets rolled up into the unit price rather than paid out, thus a yearly tax on dividends and interest reduces to 0%.
Capital gains tax is only applicable to withdrawal for a top tax bracket individual, which effectively reduces from 18% to 12%.
ZERO capital gains tax payable on death when inherited by spouse or children as the assets are not sold. This enables the investment to build more cumulative returns over time, effectively creating more wealth.
Capital gains are calculated in USD terms and do not include gains from the weakening of the ZAR.
Drawbacks of this structure:
Within the first five years the investor can make only one loan and/or one withdrawal against the investment. This can be a partial or full loan/withdrawal against the invested amount. (After five years it becomes an open structure and additions, and withdrawals are unlimited).
A withdrawal may take up to 15-20 working days.
This investment can only be made in the personal name of the investor, or offshore company and offshore trust.
For investments made with SA companies & SA Trust capital there are different beneficial structures to help invest with offshore exposure and benefits.
Minimum investment amount is $18 000.
Utilising the correct structure to invest offshore will not only pave the road to wealth generation for you and generations after you, but it will save your loved ones a lot of headaches and costs when you pass away and hand over the legacy built.
As with all investment options, it can best be navigated with the guidance of a professional, qualified, financial advisor.
“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett
Gustav Reinach is a financial advisor at Brenthurst Wealth, Pretoria. email@example.com
Many investors are searching for the one thing that will deliver investment success. The best place to start and arguably the most important investment rule is this – asset allocation. As coined by investor David Swensen: “Overwhelmingly, the most important is asset allocation” he said. “It actually explains more than a hundred percent of returns in the investment world.”
Asset allocation is more than diversification. It means dividing up your capital among different classes, or types, of investments (such as stocks/equity, bonds, commodities, property and even Bitcoin) and in specific proportions that you decide in advance, according to your goals or needs, risk tolerance, and stage of life. Although different goals may have different asset allocations e.g. cash for emergencies or equity for a long-term wealth plan, an entire portfolio from retirement funds, tax free savings accounts (TFSA’s), discretionary investments to physical properties should be looked at as a whole to make sense of an overall asset allocation strategy.
Harry Markowitz, the Nobel Prize–winning father of modern portfolio theory famously said: “Diversification is the only free lunch.” This is because spreading capital across different instruments or asset classes decreases risk, increases upside returns over time, and does not cost anything. The trick is sticking to the overall asset allocation plan and not deviating from it.
Diversification vs Asset Allocation:
Diversification means spreading capital among different asset classes, whereas asset allocation refers to the percentage allocated to each asset class.
We have all heard the old saying “Don’t put all your eggs in one basket.” Asset allocation protects you from making that financial mistake. Sounds easy but I know people who have violated this by investing all their capital into South African listed property, put most of their capital in Steinhoff as well as a couple who have invested most of their capital over many years into but-to-let properties (and have had faced many challenges over the past 10 years). In all three scenarios the different asset classes behave differently at different times. To make smart choices it is important to understand the purpose of each asset class and its behaviour during different times in the market cycle, in order to make smarter financial decisions depending on the investors’ financial goals.
What is important to understand is that what goes up, must come down. This means during the investment lifetime there will be drops in the value of the investment (think about the market drama of 1987, 2000, 2008 and 2020.) Whilst the value of investments is designed to go up over time, this does not mean investing in one specific asset class is ideal.
The three main asset classes – equities, fixed income, and cash and cash equivalents -have different levels of risk and return, and thus each will behave differently over time.
At some time in our lives, every one of us will need a cushion to cover our needs in case of an emergency or a sudden loss of income. No matter your income level, you need some liquidity —or instant access to cash. It is possible to be rich in assets and feel poor because you do not have cash or liquidity. A lot of people in the US were caught short in 2008 when the banks froze up and stopped lending (even to one another), and real estate seemed impossible to sell. This cash is also needed for short term needs such as day to day expenses and to cover for emergencies. The best places to save for this are in Bank accounts in liquid savings accounts, 32-day notice accounts or fixed deposits.
When you buy a bond, you are receiving a promise—to return your money with a specific rate of interest after a period of time (the maturity date). That is why bonds are called “fixed-income investments.” The income—or return—you will get from them is fixed at the time you buy them, depending on the length of time you agree to hold them. And sometimes you can use those regular interest payments as income while the bond matures. There are many bonds, many of which are rated by various agencies according to their levels of risk, such as South African government bonds rated as below investment grade or ‘’junk’’ thus offering a higher premium for more risk. Bonds can also be confusing- they increase in value when interest rates go down and decrease in value when rates go up. Who wants to buy my old low-interest-rate bond when a new bond with a higher interest rate comes on the market (hence the value of my bond decreases) and vice versa. One way to avoid worrying so much about price fluctuations in bonds is to diversify and buy into a low-cost bond index fund, Unit Trust.
Equity or stocks are shares of ownership issued by companies. Equity has gained popularity over the last decade and can further be sub-categorized into small-cap funds, mid-cap funds, large-cap funds, large and mid-cap funds, dividend yield funds, thematic funds, quality funds, value funds, focused funds, sectoral funds to name a few.
Residential property as an investment to Real Estate Investment Trusts (REITS) that are companies which invest in different types of property locally and abroad such as Residential, office, commercial, malls, industrial all with the objective of trying to invest. This type of investment is more sensitive to changes in interest rates and an important part of any portfolio specifically those looking for income.
A commodity is a resource which is used in the economy. Examples include oil, gas, timber, gold and wool. Commodities are used by manufacturers as raw materials in their production processes. Like any good, the prices of commodities are set by the market, as a function of supply and demand. The prices will fluctuate due to changes in industrial demand, supply constraints or seasonality. Gold being the most popular in the investment universe is a very popular hedge against inflation and should be used as part of every portfolio. Bitcoin, not a commodity, interestingly enough is supposedly expected to be the longer-term replacement of gold. Whether this will be the case we will have to wait and see.
Types Of asset allocation:
There are a few types of asset allocation but three that I would like to make specific mention of:
Strategic Asset Allocation – This is deciding on the allocations to each asset class with the goal of striking the optimal balance between risk and return. For a long-term investment this would imply trying to achieve the greatest return with the least amount of risk. A portfolio can be rebalanced annually in this case.
Tactical Asset Allocation – Is a much more active approach of allocation to take advantage of current market movements, those with this type of strategy move in and out of positions more actively depending on market trends.
My personal favourite, the Core-Satellite Asset Allocation Strategy which uses a strategic asset allocation to make up the core of a portfolio with a tactical asset allocation to make up the satellite components such as using tech, biotech, healthcare, gold or Bitcoin.
Regardless of whether you need a portfolio that is more concentrated in stocks or bonds, always consider diversifying within each asset class as well. For instance, if you are investing in stocks, you might want to hold some large-cap stocks, mid-cap stocks and small-cap stocks. You might also base your investment decisions on geography, holding both domestic and international stocks. Similarly, when it comes to fixed-income allocation, you might want to hold bonds of various maturities. All the above can be done either using a portfolio of low-cost index funds, active manager funds or in my preferred case, both.
Determining your portfolio’s ideal asset allocation is not a once off process. It is important to regularly make sure your asset allocation reflects your current financial situation, time horizon and risk tolerance. If this is something you struggle with, it may be worth considering the help of a professional.
A rare event took place when the ANC supported the DA`s proposal to approve the Pension Funds Amendment Bill.
If this proposal is approved by the government, members of a retirement fund will be allowed to borrow an amount equal to up to 75% of their retirement savings. In other words, the members will be allowed to use their retirement savings as security/guarantee for a loan.
The hardship experienced by the public during the Covid-19 Pandemic has been the motivation for this proposed change. Using retirement savings as a guarantee for a loan will certainly give some relief in the short term, but in the long term it could have a detrimental, even devastating effect on personal finances.
Current pension fund legislation only allows for retirement fund benefits to be applied only for home loans. Using retirement savings as security for a home loan is already concerning, but at the very least a house is an asset which can be sold to pay off debt. This is very seldom the case with a personal loan to, for instance, cover living expenses.
Let us look at the following scenario should the amendment bill be approved:
Mr. van der Merwe is 42 years old and needs cash for home renovations and to pay off his credit card and other clothing accounts. He has a pension fund with a current market value of R2 000 000. He doesn`t have any other investments and has made no provision for an emergency fund. He has always reasoned that there`s no money left at the end of the month for such luxuries.
He decides to apply for a loan offering his pension fund as security. According to the Amendment Bill, he would be able to apply for a maximum amount of R1 500 000 (75% of his retirement fund). The bank informs him that he only qualifies for a loan of R350 000. The interest rate payable is 22.50% over a 6-year term, which is not unusual for this type of financial endeavour (R8 300 per month).
Two years later, his employer informs him that they are struggling financially due to the Covid-19 pandemic. His salary is reduced by 30% which results in R15 000 less in his pocket. By this time, the cost of living has increased, and he still has four years left to pay off the loan. Reluctantly he informs the bank that he would not be able to make the required payments. Therefore, payment of the outstanding capital balance of R276 000 had to be made from his pension fund that was offered as security. This will have an unfavourable effect on Mr. van der Merwe’s retirement savings.
Another aspect to consider is the possible tax implications when the borrowing facility claims a portion of Mr. van der Merwe’s pension.
One might ask what the fuss is all about. It is not as if Mr. van die Merwe lost all his retirement savings. Unfortunately putting your hand in your savings cookie-jar is like not being vigilant about the sun when you are young: the damage is only realised at a later stage.
Although Mr. van der Merwe will not have to cash out all his retirement funds, we often do see cash-outs of retirement funds when people change employment or – even worse – become retrenched. The example below illustrates the effect of such cash-outs on your retirement funds.
Suppose you make a monthly contribution of R1 000 to your retirement fund, which increases yearly by 5% and yields an investment return of 8% per annum. The total value of your investment after 40 years for different scenarios will be as follows:
Cashing out after 20 years
R 2 233 868,76
Cashing out after 10 years
R 3 916 297,24
Not cashing out
R 6 125 352,54
The graph highlights how important it is not to cash out your retirement funds before retirement. It is best to leave these funds in their intended place and let compound interest work its magic.
Research has shown that only 6% of South Africans can maintain their standards of living during retirement, and these findings were based on people who are economically active. In general, for every R1 million invested, a gross annual income of R40 000 can be generated for 25 years, assuming the income increased annually with inflation. Stated differently, if you require a gross income of R40 000 per month, in today`s monetary value, you will need retirement savings to the value of R9.3 million.
Retirement projections usually assume a life expectancy of 90-95 years. Although this advanced age has often been questioned by investors, one can easily believe that life expectancy will increase considering the major advancements being made in the medical/biotechnological fields. Considering that retirement age is commonly between 60 and 65, there is potentially a long time for which sufficient provision must be made.
What will happen if you have not put any money aside for retirement? Relying on the government is sadly not the answer. The maximum amount that you can receive for a pension grant is currently R1 890 per month. If you are older than 75 years, it will edge upwards to R1 910 per month.
The problem with these grants is two-fold: for the individual this amount of money is not enough to make ends meet. On the other hand, the excessive amount of people queuing for these grants is another financial burden for the government. This further impedes the state’s ability to provide the public with necessary services. It is imperative that South Africans should embrace a culture of saving (for retirement); which is currently sadly lacking.
This precarious situation has certainly caught the eye of those in power.
As from the 1st of March 2021, Provident Funds will be treated the same as Pension Funds and Retirement Annuity Funds, meaning that only one third of the value may be taken in cash at retirement. In the explanatory memorandum that accompanied the Taxation Laws Amendment Bill of 2013, Treasury stated that:
“The absence of mandatory annuitisation in provident funds means that many retirees spend their retirement assets too quickly and face the risk of outliving their retirement savings. In view of these concerns, it is the government’s policy to encourage a secure post-retirement income in the form of mandatory annuitisation.”
These changes, in terms of the Taxation Laws Amendment Act, intend to encourage a greater savings culture amongst members of provident funds. The proposed Pension Funds Amendment Bill is barking up a totally different tree.
South Africans have a poor relationship with debt that started long before the Covid-19 Pandemic created our new reality. 2020 has come and emphatically unmask any remaining mysteries about this virus that is hounding every other Koos and Sipho.
A survey done by TransUnion showed that 85% of consumers are worried about paying their bills and 29% expect to run into a shortfall.
The table below indicates that our debt situation is worsening, with especially personal loans and clothing accounts being our Achilles Heel. It is frightening to consider what might happen if retirement funds are suckered into this dire situation.
Offering part of your retirement fund as security for a personal loan will open avenues to cash that were not previously available. In certain instances, it might even be a good idea and work out well. However, for the average Joe, old habits die hard, and this old dog will struggle with this new trick. If Rocky continuously digs holes in the garden, would you plant your fragile orchid in the flower bed?
By Brian Butchart, CFP®, Managing Director Brenthurst Wealth
FOMO Has Always Been There
Investors like to compare their portfolios with others and not just those of friends and family. No, investors like to compare their portfolio performance to those who achieved the best possible returns. It is only natural and if you start looking at what you “could’ve made” (even if it is that 1 in a 1000 chance), the fear of missing out (FOMO) is a sly devil that could lead to bad investment decisions. It’s not a new phenomenon, even if the term “FOMO” only recently got popularised.
Let’s take smartphones as an example. When Apple released its first iPhone in June 2007, the company’s share price gained 37.20% in the following year. Investors knew that smartphones were the next big thing, but Apple wasn’t the company everyone was chasing. No, that mantel belonged to Blackberry, which returned 75.36% over the same period, more than double Apple’s performance. Blackberry made great smartphones and was dominating the market at one point, but there is a reason why investments carry a disclaimer of “past performance is not necessarily an indicator of future performance”. From July 2008 to where we are now in 2021, Apple’s share price gained an astonishing 2 383%. In comparison, Blackberry’s share price is down 92%. Chasing something that delivered a good return the previous year, may not provide the same fortune the next year. The same thing can be said about sectors, asset classes and funds.
Sectors Rank Differently in Performance Each Year
The below table ranks the sector performance over each year. On closer inspection, you will often find a top performing sector in one year, fall down the rankings the very next year. To illustrate this, we followed Health Care’s performance each year. If you stood at the start of 2016 and looked at the performance of Health Care in 2014 and 2015, you would’ve felt some FOMO if you missed out, but switching your portfolio to this sector would have had disastrous consequences as Health Care was the only sector to record a negative return in 2016.
Source: Morningstar, Sharenet Investments
Diversification Reduces Risk of Picking the Worst Performing Sector
Picking the top performing sector each year is a super power yet to be discovered in any investor no matter how good or legendary. Diversifying portfolios by allocating across sectors is the best strategy. The difference between the best and worst performing sector in the market is usually around 30% and could even be as big as 83%, like we saw in 2020 (graph below).
Large Returns Concentrated in Certain Sectors Fuel FOMO
Investors who were not invested in global equities over the past few years and in particular Mega Cap Technology and Biotechnology sectors, lost out on stellar growth and one of the fastest and strongest recoveries in market history, post the COVID-19 volatility of March last year. Technology, Communication Services and Health Care led the recovery as lockdowns, unprecedented stimulus, dovish monetary policy and historical low interest rates pushed valuations in these sectors to highs never experienced before. The staggering difference in returns is even more apparent when compared to other asset classes like bonds and property.
Investors often ask their wealth advisors about switching into growth style sectors, like technology, as these have delivered superior returns compared to multi asset funds and value style stocks. I caution against making this comparison as these all serve as important components of a long-term portfolio, rather than stand-alone investments.
Investors must remember that bonds, property, and cash all serve a purpose when included alongside equity in a portfolio. In my experience, these asset classes hold up better than equity during times of economic crises, which happens to be the most likely time investors need to dip into their funds. Being forced to sell when the market is at a low must be avoided. Including value style stocks within the equity portion of a portfolio adds another layer of protection in the event of a downturn and it is one factor that has started to play out in 2021.
A Value Revival
Value stocks are recovering following years of underperformance that was magnified during the COVID-19 crash. This comes off the back of extremely high valuations in growth sectors, in part due to record low interest rates, that investors no longer find palatable. The top three best performing sectors in 2020 all find themselves in the bottom half in the first quarter of 2021. Active fund managers with a value bias benefitted from this.
The sector rotation from growth into value has happened spectacularly fast. By March 2021, value regained the ground it lost during the pandemic.
Emerging markets should be the next focus point, currently offering substantial value relative to their developed market counterparts in the same sectors and hence the rotational swing to China and other emerging markets.
Beware of Concentration Risk
The value style and multi-asset funds were never intended to necessarily beat growth orientated funds. Instead, they offer diversification and serve a purpose in the construction of the overall portfolio to benefit from lower valuations and protect and preserve against risks when markets start gyrating, as they inevitably do. These funds offer alternative asset classes with the objective of beating money market and inflation and at the same time preserving capital.
As financial advisors, our focus is on the importance of generating consistent and reliable returns under different market scenarios while protecting clients’ investments from the downside, aligned to their respective risk profile. Right now, rising inflation poses a risk to central banks, which may prompt interest rate hikes. Should this risk materialise, we should see equity valuations pull back as rates go higher and that is when a flexible fund or equity with a value bias becomes a welcome sight for the investor.
For more than 10 years now Brenthurst has constructed multi-themed international portfolios for clients across multiple unit trust funds and solutions, successfully incorporating the above philosophy and delivering stellar performance to clients. More recently, Brenthurst partnered with Sharenet Investments to construct personal share portfolios both internationally and locally making use of investment tools like sector diversification, to spread the risk across personal share portfolios and improve long-term objectives. It is also important to keep a finger on the pulse of growing industries like eSports, 5G and renewable energy. We identify these trends and analyse thousands of stocks and ETFs resulting in a low-cost portfolio that manages the risk while also giving our clients exposure to high growth sectors as well as geographic regions, with access to a world class Trading Platform to monitor in real-time.
2021 Checklist for the Smart Investor
– There are going to be headwinds, new COVID-19 “waves”, potentially higher yields, a buoyant US dollar and heaps of uncertainty. These are all ingredients for a potential bumpy ride in the markets.
– Volatility is the price you pay for participating in the returns so do not exit the market after a large correction – it is normal market behaviour.
– Understand what risk tolerance is and how this applies to you. Everybody wants a 30% (or higher) return; few can stomach a 30% decline in portfolio values.
– Diversification, sometimes referred to as the “only free lunch” in investments, is an integral factor in the construction of an investment portfolio.
– Take the time to set personal investment goals and objectives suited to individual needs. No person’s requirements are exactly the same as that of another.
– Failing to plan, is planning to fail…Stick to your financial plan. Historical returns are no guarantee for future success.
– Be clear on the investment’s objective. Is it for retirement, leaving a legacy, protecting the future financial security and money requirements of children or a spouse/partner or perhaps for an entrepreneurial venture sometime in years ahead?
– Investing is one component of an overall financial plan. A comprehensive plan also covers estate planning (always have a will that is up to date with current personal circumstances), risk planning and tax efficiency.
Understanding inflation is an important factor when it comes to financial success. If you do not factor inflation in when deciding where to put your money – whether that’s savings accounts or investing – you could find your pot shrinking over time.
The inflation statistic is one economic metric many people are familiar with, but potentially misunderstand. Inflation is often used as a key benchmark to review investment returns. Beat inflation, and you are doing well. Not so fast, as there are layers to inflation.
Past 10 Years of inflation in SA:
3 Year annualised
5 Year annualised
10 Year annualised
CPI Daily index
Source: Profile Data 11 February 2021
The 10 year annualised inflation rate is calculated at 5.07%.
The prices of a variety of goods – food, fuel, utilities (electricity especially) and medical aid – go up by much more than the median rate and these pose a risk to investment returns. There are a lot of debates that inflations is a lot closer to 10% in South Africa if it is not more.
The long-term effects of inflation can cause crippling financial pain in the course of your lifetime, but particularly at the point of retirement if you fail to plan sufficiently.
On an inflation rate of 5.07%, today you will need R1 640 to buy the equivalent in essential goods and services you may have bought for R1 000 in 2011.
But as mentioned above let us do an example of inflation rate at 10%.
On an inflation rate of 10% that indirectly sounds more realistic for an average income household, today you will need R2 594 to buy the equivalent in essential goods and services you may have bought for R1 000 in 2011. More than double. The purchasing value of your investments, savings and pensions are therefore, essentially being eroded.
On the graph below showing four of the biggest balanced funds in South Africa the past 5 years:
A South African Balanced fund would normally try and achieve a return of inflation +4% (CPI+4%). This would mean on an inflation rate of 4.47% annualised (refer to the CPI index table illustrated earlier), balanced funds would have wanted to achieve a return of 8.47% per year.
This was hardly the fact in SA. If this example were done with the debated inflation rate of 10% the outcome looks even worse.
At Brenthurst we are very aware of this dilemma that South Africans are facing. We are actively looking for solutions and portfolios to combat this elephant in the room. This is one of the big reasons why we have been moving capital to offshore equity holdings for about 10 years apart from long term rand depreciation.
Rand depreciation over 10 years (7.26% annualized):
Source: Profile Data & Highcharts.com
It is essential to invest intelligently and ultimately, not simply relying on cash deposits for ‘inflation-proofing’. Maintaining a standard of living is critical for all of us, and according to research, a significant percentage of people actually underestimate the future cost of being able to afford and provide the essentials, at different points in their lives.
Although it is difficult to identify the impact of inflation, for example, in your monthly outgoings, it is inevitable that the price of your lifestyle will increase. This increase in prices can be damaging if, for any type of reason, you stop working and have to resort to living off your life savings.
A long period of inflation means many household staples cost considerably more now than they did 10 years ago, meaning your money has to work a lot harder to buy the same things.
The cost of some foods, for example, has rocketed.
The latest research from the Pietermaritzburg Economic Justice and Dignity Group (PEJDG) shows that food prices rose by 17% over the course of 2020, spiking much higher than inflation for the year.
In December 2020, the total price of a basket of food to feed a family in a month was at R4,002.42, marginally lower than the same basket in November (R4,018.22).
However, when comparing a like-for-like basket of goods between December 2020 and December 2019, a family would be paying almost R520 more. That is roughly a 14.93% increase year-on-year.
Worryingly, the price hikes are being driven by a number of staple and ‘core’ foods in the basket. These are food items which are purchased first by most families in South Africa, which take priority over more ‘luxury’ items.
Here, items like sugar beans, rice, bread and flour have seen price hikes between 31% and 68%. Fresh fruit and vegetables – necessary for a nutritionally complete diet – have also seen major price increases.
Numbers of women who are economically active, either in formal employment or in entrepreneurial or trade ventures, have grown steadily in the past decade. The traditional family unit with a husband as the main breadwinner is changing. Having a joint income has delivered significant financial benefits to families.
Yet many spouses do not always approach family finances in a coordinated, sensible way. For many this approach works absolutely fine, until the unexpected occurs. A divorce, retrenchment or other unanticipated events quickly expose the fault lines of a relaxed money management style.
Five issues to focus on for sound money management for couples:
The household budget
Agony Aunty columns in consumer magazines are flooded with requests for advice about household finances. A husband complaining that a wife spends too much (even though she earns a salary of her own and contributes to joint finances); a wife saying her husband manages all the money earned in the household and she has little say; a spouse ‘hiding’ money in a separate account. A comprehensive household budget that lists all income and expenses (including savings) is an important starting point. Thereafter a decision must be made about who pays what. One spouse can, for instance, pay all costs related to children. e.g. school fees, sport activities, clothing; groceries; household assistants like a domestic worker, gardener or child minder, and entertainment costs like cable tv subscriptions, while the other pays the bond or housing costs, medical aid and insurance. How the expenses are covered is not that important, joint decision-making is.
Successful investing for couples requires setting joint investment goals as well as individual goals. Joint goals can center around long-term plans for retirement or investing in property (typically the family’s residence). Individual goals are important as statistics show that women outlive men by several years. Which means provision must be made for sufficient funds to manage the household or have enough for retirement for the surviving spouse. This does not mean a joint investment is the ideal way to go. As with setting a budget joint involvement is what is required. Using one adviser for both spouses is advisable as the advisor will make sure the investment strategies are aligned and that each individual’s personal investment approach and risk profile is considered. Having separate investment portfolios also provides protection if a spouse dies as the remaining spouse will have access to funds while the estate is wound up (if not married in community of property). Nobody gets married with the plan to divorce but again, statistics show that this is a reality. Individual investment portfolios will thus also have great value should that happen.
Everything does not need to be the same
Respect one another’s viewpoint. Men are often willing to make riskier investments while women may prefer a more moderate approach to investing. A share portfolio might be the perfect fit for him, but she is much more comfortable with a fixed investment. There is room for both with the correct planning. By incorporating the combined financial plan and seeing the same adviser these risk appetites can be incorporated to satisfy the needs and goals of each investor, make both feel comfortable and their opinions valued.
Be prepared that things may change
When you initially married your life looked different. You were young and at the beginning of your life. As you grow older there might be opportunities to make changes to your career or realise a dream. You might need to take a sabbatical to finish your studies, reducing your monthly household income and savings. Be open to your spouse about these opportunities or potholes. Make a conscious choice to talk about things that might influence your financial plan, see a financial advisor at least once a year to adjust the plan if needed.
Always have a will in place
Not having a will in place can be one of the most devastating financial events in the event of the death of a spouse. It creates a myriad of complications for the surviving spouse and could result in short term or even long term financial hardship. A will needs to be reviewed at least every three to five years or immediately when circumstances change. Something like the birth of a child, divorce, buying of property or acquiring an offshore asset, are matters that have an impact on estate planning and must be included or specified.
A spouse also needs to know if he or she is nominated as a trustee of a possible testamentary trust and be informed what the trust is set to achieve and what the expectations will be of the trustee.
Making money matters a family affair will not only contribute to household harmony, it also provides protection when the unexpected occurs.
Two noticeable demographic trends developed in the past decade or so amongst higher income groups in South Africa. The first was growth in the number of people and families who left the country and relocated to countries like New Zealand, Australia, the USA and UK.
The second and bigger trend, is the number of people who migrated from the northern parts of the country to coastal areas, especially the Western Cape.
Towns like Stellenbosch, Cape Town, Paarl and Franschhoek as well as other regions along the Cape coast have experienced a significant influx of families seeking a new lifestyle.
This was a driver for the growth of wealth management companies, and many have added offices to serve the growing client base in these areas. Brenthurst Wealth is one of those that added more offices in the Western Cape to manage the higher demand. The company now operates offices in the V&A Waterfront and Claremont in Cape Town, Tyger Valley in Belville and Stellenbosch in the winelands.
In addition to the migration from Gauteng, a further migration has now picked up pace with residents of Cape Town relocating to areas out of the city. Partly because of traffic congestion and also crime but also for a ‘country’ lifestyle. Estates like Val de Vie in Paarl and Delta Crest in Stellenbosch and others have experienced this influx.
“Before the COVID-19 pandemic many people already researched relocation away from the city, but as business operations changed this year many professionals realised they can work remotely and do not have to be at an office every day. Technology like Zoom and MS Teams and others made it possible to maintain office communication without physical presence at an office,” says Ryk Neethling, head of marketing at Val de Vie.
This growth has led to the establishment of another Cape office for Brenthurst Wealth at the Polo Village office complex at the estate.
“Val de Vie is a rather unique estate and offers a great lifestyle. Residents include successful businesspeople, entrepreneurs and professionals who are interested in building global wealth. We established the latest office on the estate to serve them efficiently in the personalised style such investors prefer, without having to travel anywhere” says Magnus Heystek, co-founder, director and investment strategist of Brenthurst Wealth.
“There is great awareness and interest in investing offshore, where the best returns have been realised for almost a decade now. The local market has experienced very low to no growth and investors are moving investments to international market to build and protect wealth,” Heystek says.
Beyond adding more offices Brenthurst has also expanded its service offering to clients with international assets. Estate planning for offshore assets requires knowledge and experience in the legal requirements and issues like tax regimes in different territories. We have two such legal experts in-house – Malissa Anthony who serves the Western Cape Region and Rozanne Heystek-Potgieter who serves the Gauteng region. “They guide clients about offshore wills and the winding up of international estates and also the setting up of trusts via the Brenthurst office in Mauritius,” Heystek added.
Saving for retirement is considered by many to be a very important, if not the most critical, component of an overall financial plan. Yet many people delay getting a proper retirement plan in place, or save too little, or not at all – for retirement or other financial needs – as the many reports reviewing the SA savings culture has shown for decades.
Some have retirement saving strategies in place but do not really review it regularly or pay attention to the investment vehicle they chose for retirement or worse, take a serious look at the returns they are achieving with whatever investment they have in place.
The investor’s age – or stage in life – requires steps regarding retirement. This is a guide of what to consider. The most important thing to do is to not delay getting a plan in place or adjusting an existing plan to current realities.
In your 20s, for most the start of working life
Start with a savings plan aimed at retirement from your very first paycheck. If the company you work for has a pension plan in place, be sure to join that. If not, find another investment vehicle, for instance a Tax Free Savings Account or Discretionary Investment Portfolio, and set up regular contributions with an annual increase of that contribution. Many financial planners suggest saving 20% of your monthly income. At the start of a career this may seem like a lot but do aim for this if at all possible. The longer you save for retirement the bigger the benefit you will gain from the power of compounding.
Aim to save at least 10% of monthly income.
Investigate tax efficient options for saving for retirement.
Do not be too afraid of taking risks, time is on your side. Many investors shy away from investing in stock markets as they are uncertain about the ups and downs markets are known for. But over the super long term it has outperformed other investment options by a wide margin.
Diversify with offshore market exposure for a wider range of investment opportunities than what the local market offers.
In your 30s, time to get serious
If your 20s flew past and you either did not save or saved only a little without a proper strategy in place, in your 30s it is time to step up the effort.
The aforementioned goal of saving 20% of monthly income should now be considered in all seriousness. Still too much? Maybe up the 10% of the previous decade of your life to 15%. Sounds impossible? It always does. It requires discipline and focus and a very long hard look at your budget. Now that your salary may be a bit higher, the desire to upgrade your lifestyle – like buying a new car or moving to better accommodation – may be very strong. Delay that upgrade or even resist it altogether.
Aim for saving 15% of monthly income.
If you change jobs do not cash in what you have saved towards your pension. Transfer it to the pension plan of your new employer or engage a financial advisor about alternative investment options. Your future self will thank you.
Understand where other savings goals – for instance for children’s education – fit into your finances.
In your 40s, watch your spending
Careers typically gain traction at this life stage, often translating into higher salaries, perhaps additional corporate benefits … and new lifestyle expenses.
Do not reduce saving for retirement for lifestyle expenses.
Keep to the 20% of monthly income savings goal.
Contribute all or parts of any bonuses or other windfalls (like a refund from the tax man) received to your retirement savings plan.
Review your current investment for retirement. Do not only focus on the total amount, investigate the returns achieved on what you have contributed, be sure to understand the fees.
Take the time to find out if pension rules or even legislation have changed that may require you to adjust your current investment strategy.
In your 50s, it is all about what your retirement spending will be
At this stage you may think you do not feel like retiring at 60 or 65 and will continue working beyond that. So, thinking too much about what lies ahead is not a huge priority. It should be.
The company you work for may have strict rules about retirement age. Or an unexpected event like the company asking people older than 55 to retire early for commercial reasons may occur. Get your actual retirement plan in place, beyond the contributions you are making (which must be maintained).
Estimate what your likely expenses in retirement will be. So many people focus on a fixed amount that they think they will need to retire comfortably. For some total savings of R2 million will be enough and for others R15 million may be too little. The focus should be on expected expenses in retirement.
Be sure to consider the impact of inflation on costs that are hard to reduce or avoid, for instance medical aid, housing expenses (which includes utility charges).
Start thinking about downsizing. Smaller car, smaller property, etc. While still working lowering expenses on these items could release more money to add to contributions to retirement funds.
In your 60s, be prepared for living longer
You may live longer than you think. Global life expectancy has increased steadily over the past 65 years. The World Economic Forum expects people in many countries to live to 80 and beyond. Which means those who stop working or earning a regular income at age 60 will have to support themselves with savings for 20 (and likely more) years. Consider that 40 years ago people celebrating their 100th birthdays made national news. The United Nations recently estimated that the number of people who will live to 100 will increase to 537 000 this year.
If you can continue working beyond 60 or 65, consider doing just that. Or start researching alternative ideas for a regular income once officially ‘retired’.
Do not withdraw too much from your retirement spending or you will outlive your money.
Keep a very close eye on expenses. The impact of inflation must always be factored in. The average inflation in many countries, SA included, has come down in recent years but the inflation of expenses like medical aid and utilities – key expenses in retirement – are well above the national averages. The problems of SA electricity provider Eskom are well publicized and the increases in the costs of electricity are likely to continue at rates above inflation for several years.
Make use of special offers for pensioners wherever possible. Many retailers have so-called ‘pensioners days’ where regular goods are offered to retirees at reduced prices. Many municipalities offer reduced rates for utilities and in some instances for rates and taxes for retired individuals.
Considering the expected longer life span, do not cash all investments out of higher risk investments like investing in the stock market. In the current low interest environment moving all money saved to cash related instruments for interest income may not be the best option. Keep some money invested in funds or shares to have access to the higher returns these investments have delivered for decades.
Planning for retirement requires careful consideration of many factors. To navigate the options and decide what will be best for your circumstances and requirements, consult a qualified, experienced advisor to guide you. Rear more about retirement planning.
Whether you are on the brink of retirement, have discretionary funds to spare or are just starting out, there are various ways to get offshore investment exposure. No matter the size or age of your portfolio.
Individuals whose tax affairs are in order and have up to R10-million available to take out of the country – with SA Reserve Bank permission of course – the direct offshore investment route is par for the course. There is also a further R1m allowance for travel and other purposes that can be further mobilised. The money is usually moved from a South African bank account to a foreign bank account from where it can be deployed into a virtually unlimited choice of investment options and product providers.
Direct exposure to offshore markets could provide a shield against global inflation. In addition to this, having an investment in a different currency and country other than where you live is a leverage against a worsening economic climate in your country of residence. South Africa is a case in point.
There is also Capital Gains Tax savings to be had.
This type of investment can only be accessed with a large stash of cash, and like any other business or investment venture, offshore investing may be risky. You need to take your risk profile and risk parameters into consideration for any offshore investment, just as you would for local investments.
Direct Offshore Investments suit investors who have a discretionary lump sum of R400 000 or more available, have a long term investment horizon of 7-10 years and/or are planning on emigrating in the next five years.
Non-direct offshore investment options are suitable for young investors who can start out with a monthly debit order, or retirees that have a living annuity and want some offshore exposure in their living or retirement annuity and/or individuals that have a lump sum of less than R400 000 to invest.
Indirect offshore investing in global assets without the money physically leaving South Africa using asset swaps for example, are investments that are typically rand denominated. This means the impact of the rand exchange rate is already considered in the unit price of the fund/portfolio value.
Rand-denominated offshore equity funds or portfolios are local unit trusts that typically invest in a fund or funds that is/are managed and domiciled in another country, like feeder funds.
Such investments are administratively simple for investors and advisors and all it takes is a monthly debit order to be able to do so.
The disadvantages of these options are that the investor’s money still has to be withdrawn in rand. It does not physically leave South Africa and is still exposed to local liquidity risks. The investor is also limited to the select few rand hedge funds available in SA.
For those starting out, getting offshore investment exposure is not out of the question. Some local unit trusts and exchange traded funds with specific mandates allow for an array of options to start dipping one’s toes in the offshore investment pool.
If you have R1 000 or more available a month to save or invest, you can consider something like an ETF from a platform like Satrix – which recently launched a China-focused product – or options from one of Brenthurst Wealth management’s close investment associates – Sygnia – which offers several options, providing exposure to foreign assets in various forms and ways.
A lot has been written about the importance for South African investors to diversify portfolios with increased offshore exposure. Yet many do not know where to start or what the options are. Read this for everything you need to know.
With local markets providing historically low returns, there has been an increased interest in investing offshore. Many articles have been written over the last few years about why protecting your wealth by investing offshore is a good idea, along with the potential for greater returns on investments. The professionals have provided sufficient proof attesting to that fact.
What many reports fail to address is the practical side of investing offshore, the paperwork, the red tape and costs involved.
From a practical point of view, the first step to investing money offshore is converting your current capital from rand to US dollars. It is the preferred currency because it is still the most traded in the world and is always available. There are, also, unit trust funds priced in Sterling and Euro, for a wider offering. Forex consultants will assist in this process, but as with everything in life there are costs involved.
In terms of current regulations of the Reserve Bank investors can use their single discretionary allowance, which is commonly referred to as a travel allowance, and allows individuals to take an R1-million rand offshore without having to apply for a tax clearance certificate. Married couples can jointly take out R2 million per calendar year. This allowance applies to all South African residents over the age of 18 years and resets every calendar year.
This requires the completion of a few forms, to be approved by the Reserve Bank as they keep track of money going out of the country. A forex consultant can assist with the required paperwork. That is the easy part.
If the amounts exceed a million rand you must apply for formal tax clearance certificate. This process takes a bit longer and it is highly advised that an investor’s tax profile is up to date before doing so, to avoid raising any red flags with SARS.
There is also the R10 million foreign investment allowance which may be invested into offshore investment portfolios, property, bank accounts or other investments. The allowance has not always been this high, but on 1 April 2015, the foreign investment allowance increased from R4 million to R10 million per person per calendar year and R20 million per family unit reducing the amount of time you will have to wait for your certificate.
Should you wish to exceed this R11 million amount, you need to apply for a Letter of Compliance from SARS. Once this letter has been delivered, it must also be sent to the SARB for approval. Once approved, you will be able to externalise your funds.
In terms of the investment platforms, some do have minimum amounts, but the average amount between different platforms is between $20 000-$25000, which amounts to about +/- (R350-R450k), at the current exchange rate. Some notable offshore platforms available include (but are not limited to) Momentum Wealth International, Ninety One, and Glacier. This is probably the biggest hurdle that many investors face; “where do I invest offshore?” There are plenty of options, but it is recommended to understand each investment offering.
There are other options for people who do not meet the minimum investment criteria but still want to take their money out in hard currency. There are a few fund managers overseas that allow direct unit trust investments, for instance, Franklin Templeton, that allows for investments of as little as $5,000. It is a more direct route and limits choice as one can only select from Franklin Templeton funds, for example, but still an option. Before you explore how to move money offshore you should speak to an expert. At Brenthurst we pride ourselves with our in-house knowledge base and experience. Offshore investing has evolved from a recommendation to a requirement, as can be seen by the asset class returns in ZAR as well as USD.
Local and offshore asset classes’ returns (%)
Source: Ninety One / Morningstar
But the bottom line is even though South Africa’s exchange control regime seem cumbersome, onerous, and greatly complicating the transfer of funds abroad, is not that complicated.
And it is about to get even easier with the modernisation of the foreign exchange system and over the next 12 months, a new capital flow management system will be put in place, that was announced in the 2020 budget.
Individuals who transfer more than R10 million offshore, which is what is currently allowed under the foreign investment allowance, will be subjected to a more stringent verification process.
Such transfers will also trigger a risk management test that will include certification of tax status and the source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). These changes will be phased in by 1 March 2021.
The concept of emigration as recognised by the SARB will be phased out and replaced by a verification process. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Act. It is advisable to consult an experienced, qualified advisor for guidance. Read more about offshore investing: Offshore Investing.
Mags Heystek is head of the Sandton office of Brenthurst Wealth. Contact him on firstname.lastname@example.org.