By Marco Van Zyl, Senior Executive and Private Wealth Manager at NFB Private Wealth Management
Over the past 30 years, South Africa has seen a significant exodus of highly qualified and wealthy individuals who have sought greener pastures elsewhere; however, we still have a robust and competitive commercial sector run by skilled CEO’s and MD’s. Our anecdotal research indicates that although the majority of these individuals are concerned about South Africa’s future, most intend to remain in the country if possible but want the option of moving abroad at a later stage, or at the very least, the ability to visit their children living abroad given that many of them are unlikely to remain here as adults. Against this context, these are the most common questions we are asked:
Should I maximise my contributions to my Retirement Funds, or should I be sending funds abroad?
This is not a simple decision but instead requires an understanding of the asset allocation of the total balance sheet in order to adequately deal with risk. Most CEO’s who have not benefited from professional financial planning tend to have a high allocation of their assets locally due to pension fund contributions, share options and an obsession with investment property ownership.
In these cases, we need to weigh up the benefit of the tax deductions versus the risk to the retirement plan should South Africa proceed down the “low road” of prescribed assets and expropriation without compensation. Where possible we reduce the retirement funding allocation to increase the offshore allocation with the view of externalizing +-20% of the investable assets in order to reduce the risk of government interference in these assets. Reducing risk, however, comes at a cost. In this case, the cost is the loss of the tax deduction on contributions and the other tax benefits provided within the retirement products.
Once this target is reached, we again increase our allocation to retirement products but always looking to continuously move additional funds abroad with the ultimate view of being able to fund a lifestyle abroad if necessary.
On the flip side, we also have clients who are so eager to move funds abroad that they have little or no allocation in tax-efficient structures such as retirement annuities of tax-free savings accounts. There is a benefit to maximising these structures and the compounding impact of the various tax savings over the client’s lifetime. Younger clients, in particular, should not underestimate the benefit of maximising tax-free savings account (TFSA) contributions as the tax planning benefits can be substantial post-retirement. This is because these investments can be used to house the interest-bearing portion of the investment portfolio which is usually fully taxed but if housed in a TFSA will not be taxed. However, to maximise the benefits requires time to reach the maximum lifetime contributions and for the assets to grow to a material value. It is important to realize that most of these individuals will end up remaining in South Africa and should therefore use the tax deductions available to them to maximise their returns while reducing risk.
Should I be holding my assets via local or offshore trusts?
There are still many benefits to housing long term investment assets in a trust. However, these benefits are mostly related to estate planning rather than reducing tax. In most cases, the benefits of housing long term assets via a trust still outweigh the disadvantages.
For those with large offshore holdings, an offshore trust is a worthwhile consideration due to current tax and estate planning benefits as well as multi-generational planning. Trusts are a great way to protect assets through multiple generations and provide protection against poor financial planning as well as reducing estate taxes, especially on the second generation.
Bear in mind that international estate planning and taxes can be a minefield. Estate costs can be excessive hence the use of a trust.
Offshore trusts can be quite expensive, especially for smaller estates. In these cases we often recommend the “freezer trust option” as the costs are significantly lower while the trust is dormant and full trust fees are only initiated on the death of the investor. Another reason that these are sometimes preferred is that many investors do not like the idea of giving up control of their assets to trustees during their lifetimes. This option therefore allows for the trust to benefit the next generation without any loss of control in the current generation.
Should I be investing in traditional or alternative assets?
A-type personalities often want their investment portfolios to be different from the norm as they expect to outperform the average investor. Our chosen portfolios, however, are designed to deliver optimal returns. By deviating from these chosen portfolios the risk and return profiles may be skewed, likely leading to more volatility and ultimately frustration and disappointment with the investment performance. That being said, there are certain investments that have high barriers to entry due to liquidity and other constraints and these can be added onto a well-balanced portfolio as a core and satellite approach.
What life cover do I need?
Younger CEO’s may have a high level of cash flow but have often not yet built up a significant asset base to ensure that they provide capital for estate liquidity and to maintain their family’s standard of living should they become disabled or die. Young CEO’s incomes often increase exponentially, and their standard of living and debt follow suit. If their planning is not kept up to date the consequences of an untimely death or disability can be financially crippling for their dependants.
Ultimately, it’s a good idea for younger CEO’s to obtain professional financial planning to ensure their investment assets are appropriately allocated so that they deliver optimal returns.