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Financial Planning

Time for wealthy taxpayers to look offshore?

By: Sovereign Trust SA

We owe a lot of people a lot of money.’ That blunt, ominous statement by Finance Minister Tito Mboweni in his 2021 budget speech shows the deep financial hole the South African economy is really in – and warning lights are starting to flicker for South Africa’s wealthy taxpayers.

A key takeaway from the Budget was the staggering R213 billion under-collection of tax in 2021 compared to 2020. This is the largest collection shortfall on record, and comes against a backdrop of a debt burden of R5.2 trillion by 2023/2024.

As a result, there is a renewed focus on the wealthier taxpayer base, who are being singled out for scrutiny amidst calls for a ‘wealth tax’ on high nett worth and ultra-high nett worth individuals, says Tim Mertens, chairman of Sovereign Trust SA.

“Tax compliance, proper professional planning and the appropriate use of annual allowances are key to navigate any aggressive changes in tax legislation that may be necessary sooner rather than later,” said Mertens.

Going forward, this could lead to a greater number of taxpayers looking beyond South Africa’s borders for retirement and tax planning purposes. SA-based retirement annuities (RAs) are limited in many respects, with the biggest disadvantage being the prescribed investment limitations contained in regulation 28 under the Pension Funds Act.

“Our message to people looking at RAs is that there are potentially better offshore options out there, such as using their annual discretionary allowance to set up an international retirement plan (IRP).  IRPs are excellent alternatives for those wanting to invest beyond traditional onshore retirement plans, and have some key benefits that simply cannot be ignored,” said Mertens.

The SA Revenue Service and the Reserve Bank allow South African investors to invest up to R11 million per taxpayer per year, as a combination of their annual Foreign Investment Allowance (FIA) and annual Discretionary Allowance. This far exceeds the tax-free investment limits contained in an RA and tax-free savings account.

These allowances have already been taxed, there is no further tax deduction allowed when investing into an IRP – but the ongoing advantages of the IRP far outweigh onshore retirement products, says Sovereign Trust consultant Leah Mannie.

  • No regulation 28. IRPs can invest in literally thousands of global funds. There are no prescribed limits to the equity exposure nor are you constrained by geographic location of the investments.  Additionally, the IRP is typically based in hard currency (such as the Pound, USD or Euro) as opposed to the Rand which can be volatile. 
  • Earlier retirement age. The retirement age with an IRP can be anywhere between 50 and 75. In retirement, the IRP member can elect to collapse the Plan, partly retire, or draw down ad-hoc amounts that suit their specific needs. This provides incredible flexibility and planning options. There are also no limits around the amount of cash that can be withdrawn nor is there any need to purchase an annuity. This means that one’s retirement funds can remain in equity investments even when the member is in drawdown.
  • Full portability. If a taxpayer emigrates, the IRP is completely portable, whereas South African Retirement Annuity or Pension Funds are not. “As of 1 March 2021, a financial immigrated individual will need to prove that they have been non-tax resident in South Africa for 3 full years before they will be able to move their SA pensions or Retirement Annuities out of the Republic. With an IRP, there is no lock-in period to consider,” said Mannie.
  • Benefits in retirement. A member of an IRP is able to elect a distribution of benefit from the contributed capital element of the Plan.  Any drawback of the capital amount (namely the funding from one’s prior discretionary allowances) can be distributed back to the SA member tax free.  It is only when the member draws back from the capital gains account that the distribution be subject to the South African   capital gains tax regime.  Being able to segment ones IRP provides more flexibility and ultimately the ability to delay a tax event.

Any South African interested in diversifying their retirement planning in the global sphere is encouraged to look at the wider offering, consult their Financial Advisor or ask for more information, says Mannie.




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