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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 and exchange rate volatility. The rand is at the mercy of the political landscape, protests, loadshedding, Covid-19 curves, travel restrictions… you name it. Investing offshore gives you 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, the global money app, to send money offshore, with no hidden fees and no paperwork. Shyft is giving all customers 50% off transfer fees for any international beneficiary payment until 31 December 2021. Ts & Cs apply.) You’re legally allowed to send up to R1 million per calendar year to your offshore bank account. This is called your single discretionary allowance (SDA).
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.
What are my options?
You literally have a whole world of opportunities when you go the offshore route. You can buy shares in global companies like China’s Alibaba and Baidu, or U.S.-based companies like Apple, Amazon, Alphabet and more. As long as you stay within that SDA limit of R1 million per year, you can 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 foreign currency exposure and global diversification.
Exchange traded 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, 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?
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 on 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?
While investing offshore may sound exotic or perhaps a bit intimidating, it’s easier now than it’s ever been. If you’re thinking globally and like to be in control of your own money moves, you can use Shyft to convert rands into foreign currency at the best rates. Then you’re free to play the forex market, invest in offshore ETFs and international listed companies, or send money into an offshore bank account.
This post was sponsored by Shyft, the global money app, powered by Standard Bank. With Shyft you can buy forex instantly anytime, anywhere, and at the best rates, and invest in top U.S. stocks and ETFs. Shyft was named best financial solution at the 2021 MTN Business App of the Year Awards. Download Shyft now, no matter where you bank. Shyft operates under the license of The Standard Bank of South Africa Limited, an authorised Financial Services Provider (FSP number 11287).
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