Emigrating or investing offshore? How to make the most of your money – Dawn Ridler

Emigrating or investing offshore are tricky for South Africans because there are many legal complexities around your rights to invest and move your money wherever you please. Exchange control obstacles and potential tax liabilities mean that many Saffers don’t officially emigrate. It’s much cheaper, and easier, to slowly shift your funds over a period of time, using annual allowances. You need to be careful about how you make your moves, or you could find your funds frozen by a bank manager who is worried you aren’t sticking to the rules of the game. Meanwhile, even working for a few years elsewhere to boost a savings pot by earning a hard currency has become messy, as the South African Revenue Service tries to tap incomes earned elsewhere. Investing offshore has added challenges, ranging from how to choose from a vast universe of investment opportunities and reduce risks in unknown terrain, to currency vagaries that can play havoc with returns but also boost them in rand terms. Johannesburg money expert Dawn Ridler sets out some important considerations if you are contemplating emigrating or investing offshore in 2020. – Jackie Cameron

By Dawn Ridler*

I have always loved this Kipling quote:

“If you can keep your head when all about you are losing theirs and blaming it on you, If you can trust yourself when all men doubt you, But make allowance for their doubting too;!”

In uncertain times like this, when doomsday prophets are getting way too much airtime, you’re getting contradictory advice everywhere you look and the only option seems to pack your bags and trek, you need to arm yourself with a common sense strategy and knowledge so that you can make your own informed decisions.

I’m sure you’ve read a number of pundits who are urging you to take out every last cent while the liberal exchange controls let you because we’re going the Zimbabawe route. The other end of the extreme: you have the ever-so-happy #ImStaying movement.

Who to believe? #ImStaying might be more #Ihavenowhereelsetogo but that doesn’t mean you can’t hedge your bets a bit, and explore your options. If you follow my blogs or get my newsletter you’ll know that I highlight potential problems, but try to give you strategies to navigate or mitigate them. My clients often ask me what I am doing – I am lucky enough to have ‘the right of abode’ overseas so I have options already – but I am still here with no intentions of going. I also have African perspective, I have lived all over Africa, been through three coup d’état’s, been deported (well, my dad was and we had to follow suit, of course) and seen way, way worse than we’re seeing here. I have also been through a violent home invasion, and, if I ever considered leaving, it would have been then. On the other hand, neither of my children, both born here, live here anymore and probably never will again.

Before you have any discussions around investing offshore, or emigrating, you need to have a clear  investment objective, and to you need to “align” the investments, locally and abroad, accordingly. “Align” sounds really fancy and complicated, but it actually isn’t. It is just matching how your money is invested with how you see your future.

Also by Dawn Ridler: Nine steps to clean up your personal finances, build wealth #2020

Yes, you need a plan, knee-jerk reactions are guaranteed to hurt you. If, for example, your strategy is to emigrate in four years’ time your investment strategy is going to be very different to someone who just wants to have something to fall back on if they become a refugee.

Perhaps you want to be a nomad, migrating North and South to escape inclement weather, hordes of tourists or spend time with progeny that have flown the nest. Maybe you want to earn some forex by working offshore, but come back here in the long term. So how do we advisors ‘align’ your investments?

Every strategy will have different time frame, a need to grow or preserve capital, tax implications, how much you need to retire on, when where or how you’re going to retire, minimum investment requirements and so on. You, (or your wealth planner,) then needs to choose the right mix of asset classes, a cost-effective platform, tax-effective products (retirement funds, endowments etc) that will help you achieve those objectives, in the time frame you have identified. Piece of cake… Not.

Don’t make a knee-jerk decision, many of the changes you will make to your investments cannot be undone, and if they can it could be expensive. Say you want to go whole hog and emigrate – It’s vitally important that you do your homework. There are way too many people who jump first, expatriate all the funds only to find that residence status is not granted. We all like to think we are invincible and other countries would be lucky to have us, the reality is less rosy.

Also by Dawn Ridler: Wealth has less to do with income, and EVERYTHING to do with money choices

Fully financially emigrating is a Capital Gains Tax (CGT) event – and SARS won’t reverse that if you change your mind. This isn’t being ‘spontaneous’, it is just stupid. If you’re a “Green Mamba” (a South African Passport holder) without second citizenship, you have options (all of which are going to cost money of course), and it will take time to put in place. Don’t assume, we all know that to ass-u-me makes an ass of u and me, but mostly u (the “me”  is just there to make you feel better.)

What if you just want some offshore investments as a precaution? It’s not the worst idea in the world, and it will hedge against the fluctuation in the Rand.

What you do need to understand is that it is a VERY different investment market to what you’re used to at home, and expect a far lower rate of return than you get here. If you’ve got some broker trying to sell you an offshore South African controlled investment you’re likely to pay dearly for it. These brokers are capitalising on the fear that is out there at the moment and coining it.

  • Hint 1: never pay an upfront fee for advice (I have copies of proposals recently from a reputable investment house (no name, no stripy pyjamas,) charging from 1.75% to 3% of the lump sum).
  • Hint 2: look at the Effective Annual Cost (EAC), if it is above 1.5% – RUN! (Warning, keep a G&T at hand, it could be as high as 8% (again, I have proof).
  • Hint 3: Endowments are not tax-free and one of my least favourites forms of investment with a very few exceptions where they might make sense. There is one thing they are very good at, tying up a client’s money unnecessarily and making commission for the broker.

Offshore ‘fixed’ income is ultra-low, usually below 1%. This is very different from the 7-9% you can get at home.  The real rate of return is the return minus inflation. Offshore real interest rates are negative, and you have to go to the volatile share market to find returns – you’re going to get  better returns but with huge potential risk, especially at the top of a very long running bull market.

What to do if you want to work offshore temporarily? The implications here are all to do with tax and your ‘residential status’ – and the way you’re taxed is changing on 1/3/2020.

SARS wants to get its hands on income earned by South Africans especially from tax-free areas like Dubai. We have agreements with many other countries so you’re not taxed twice but not with ‘tax havens’ and sandpits much loved by South Africans.

I don’t know about you, but I think there is something inherently unfair expecting someone who isn’t using our infrastructure to have to pay for it. You know what I mean, paying for public hospitals and not using them, paying for government schooling and not using it, playing for policing and having to pay for armed response… Hang on! That’s right, you are anyway! Changing your residential status comes with a bunch of issues like CGT and Blocked Rand Accounts so I strongly recommend you discuss with an emigration and tax specialist first. Remember, at the moment you can take out an effective R11m a year, per person. Just saying.

What if you take everything you can offshore, yet still live here? This is a scenario that is recommended by some pundits at the moment but is a classic case of not aligning your portfolio with your long term objectives, and comes with some inherent risk that you need to understand and be comfortable with before going down that survivalist route.

Here and offshore, there are four basic asset classes: Shares, bonds, cash and property. When you have an investment portfolio in a country that you are not living in (and may intend never to live there) you have one added factor – the exchange rate.

The doomsday prophets who are trying to get you to get everything out, have made their own assumption (another ass-u-me) that this country is going to hell, and the Rand depreciation is only going to accelerate, making everything you take out more valuable.

This is compelling on two levels – you take your money out of the hands of greedy and corrupt politicians, and you could really win “when” (really if…) the Rand continues to depreciate.

This is a double, appetising whammy – it plays on your fear AND greed. I get this. I had a small offshore investment in 2008 that I sent out at R7 to the dollar. It did a fat goose egg, zip, zero, nothing, in Jersey for 3 years, and I brought it back at R10 to the dollar and made a nice currency gain.

So, in summary: Decide why you want to invest offshore, what your long term objective is then get a wealth advisor to set it up properly before doing anything rash that can’t be undone.

  • Johannesburg intermediary Dawn Ridler, MBA, BSc and CFP ® is founder of Kerenga.