INVESTMENT ANd RETIREMENT PLANNING FOR THE EXPATRIATE SOUTH AFRICAN WHO HAS RETAINED THEIR ORDINARILY RESIDENT TAX STATUS AND FUTURE SOUTH AFRICAN

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1 INVESTMENT ANd RETIREMENT PLANNING FOR THE EXPATRIATE SOUTH AFRICAN WHO HAS RETAINED THEIR ORDINARILY RESIDENT TAX STATUS AND FUTURE SOUTH AFRICAN RESIDENTS

2 RETIREMENT PLANNING IN SOUTH AFRICA As life expectancy improves, many of us are looking forward to what is likely to be a longer and more active retirement. But as expectations for retirement increase, so does the need to ensure you re well-prepared financially. In some countries, state support is inadequate and cannot be relied upon. Saving more and earlier in the most tax-efficient manner is likely to provide the best rewards. It s also vital that your savings are secure and have the best opportunity for growth. If you re a South African expatriate thinking of returning to South Africa, or a non-south African considering moving to South Africa, you may have concerns over investing in the Rand (ZAR), given its volatile history. Investing in a less volatile currency (often called a hard currency ) is therefore likely to be a key requirement for you. INTRODUCING THE INTERNATIONAL PENSION PLAN Since 1 April 2015, international pension plans have been available to South African residents and non-residents with wealth in South Africa due to a relaxation in South African exchange controls (this is the amount of money you can transfer out of South Africa - please see page three for further details). International pension plans offer the opportunity to invest for retirement in a taxefficient, secure environment, while protecting against currency volatility. There are various international pensions suitable for expatriates, with some designed specifically for South African residents. Old Mutual International doesn t offer a South African international pension plan, but offers offshore bonds that are a suitable investment solution for the international pension plan to invest in. You could also hold an offshore bond as a standalone investment to help supplement retirement income and to provide for loved ones. Your financial adviser will be able to help you choose the most appropriate retirement solution for your circumstances and advise on the tax implications. Your investment may fall or rise in value and you may not get back what you put in. This brochure describes the investment options we offer to help alleviate some of the tax inefficiencies and restrictions on pension savings that South Africans returning to South Africa, or non-south Africans planning to live in South Africa, would otherwise experience. Our investment options are: An Old Mutual International Offshore Bond as an investment within an international pension plan (Old Mutual International does not offer the international pension plan) An Old Mutual International Offshore Bond as a standalone investment An Old Mutual International Offshore Bond within an offshore trust When is it best to take out an international pension plan? As legislation and tax rules are constantly changing, there is no guarantee that international pension plans will continue to be available for new investments. This is something to consider in making your decision on when to invest either well in advance or just before you move to South Africa. Please discuss this with your financial adviser. 2

3 RETIREMENT PLANNING IN SOUTH AFRICA INTERNATIONAL PENSIONS International pension is a global term for arrangements that are available to expatriates around the world to enable them to invest for their future retirement. A number of providers in different jurisdictions offer international pension plans that are serviced from many financial service centres around the globe. What are the benefits of an international pension plan? Investing in an international pension plan allows you to: Consolidate the international assets/ investments you ve accumulated for your retirement. Avoid probate and maintain confidentiality in terms of who benefits from your assets following your death, in a similar way to a trust arrangement. You will need to ensure that the international pension plan you choose specifically covers South African legislation, terms and definitions. Exchange control limits on local currency South African exchange control regulations currently grant individuals with an annual investment allowance of ZAR 10 million, subject to them obtaining a tax clearance certificate, together with an annual discretionary allowance of ZAR 1 million which doesn t require tax clearance. Invest in a hard currency, reducing the risk of currency fluctuation. Hold assets or cash that are not subject to estate duty or donations tax. Can provide access to capital prior to retirement in the form of a loan. This must be repaid prior to the international pension plan providing retirement benefits. Choose the currency that you would like to invest in. Continue contributions to your international pension plan when you live in South Africa subject to having wealth outside of South Africa, through exchange control or money previously earned overseas. Take withdrawals tax efficiently, so that capital and growth accumulated as a non-resident are used first. After that, withdrawals are taken on growth after becoming a South African resident. If the international pension plan is invested in an Old Mutual International Offshore Bond, it will only be subject to capital gains tax (CGT) rates. 3

4 Benefits of an Old Mutual International Offshore Bond With an Old Mutual International Offshore Bond, there is the convenience of consolidating a variety of existing or new investments into one product. We offer offshore bonds that have the flexibility to hold a wide range of different investments. Holding multiple assets in one wrapper can offer simplified, consolidated reporting, removing individual asset paperwork, dividend receipt and tax receipts. This could result in cost savings as well as reduced time and effort. shares cash unit trusts exchange traded funds investment trusts open-ended investment companies 4

5 Why choose an international pension PLAN in conjunction with an Old Mutual International Offshore Bond? An international pension plan is designed to give maximum protection to your pension savings. You also want to be sure that within your plan, you can build a versatile portfolio that meets your specific financial needs, without restricting your asset allocation or currency options. WINNER BEST INTERNATIONAL LIFE GROUP (UK) WINNER BEST INTERNATIONAL TRUST AND ESTATE PLANNING PRODUCT Subject to our acceptance criteria, using an offshore bond can help meet your investment needs. It provides the flexibility and diversity to enable you and your financial adviser to manage your assets according to your own criteria and attitude to risk. You can ask your pension plan provider to switch between markets and asset groups as and when you want all within a tax-efficient environment (read more about tax on pages seven and eight). Who is Old Mutual International? It s vital for you to have confidence in the company to which you are entrusting your savings and pension investments. Part of that confidence comes from knowing it s a strong, established company. Old Mutual International is the provider of offshore and cross-border investment solutions within Old Mutual Wealth. Old Mutual Wealth Limited is a leading wealth management business in the UK and internationally with billion in assets under management (as at 30 September 2017). Their offering includes platform-based investments and protection, asset management solutions and discretionary management, as well as financial advice services in the UK and Singapore. Please speak to your financial adviser to find out which of Old Mutual International s Offshore Bonds is most appropriate for you. WINNER Best International Life Group (Non-UK) WINNER Best International Practice in Asset Management / Life Products / Bonds WINNER Best International Trust and Estate Planning Product Old Mutual International is the collective name for the companies that provide offshore and cross-border investment solutions within Old Mutual Wealth. * As at 30 September 2017 Old Mutual Wealth is a leading retail investment business, overseeing billion for its customers*. Old Mutual INTERNATIONAL ISLE OF MAN LIMITED has operated from the Isle of Man since 1984 and manages more than 130,000 policies in tax-efficient investment and savings products. It also provides access to Old Mutual International Trust Company. Old Mutual International Ireland dac was formed in 2003 to provide cross-border solutions for European investors, so you can be confident that you are investing with a company that understands the needs of investors. 5

6 Current Tax Rules for South African Residents If you are either a South African living outside of South Africa or a non-south African who wishes to move to South Africa, your ongoing liability to South Africa taxation depends upon your residency status. Non-residents are liable to tax on South Africa income and gains only. Residents are subject to taxation on worldwide income and gains, with the tax year running from the beginning of March until the end of February. There are two ways for you to be tax resident in South Africa: by becoming ordinarily resident or by meeting the physical presence test. ORDINARILY RESIDENT This means that a person is a resident of South Africa in other words, their permanent home is in South Africa. An individual who is ordinarily resident in South Africa is taxable on their worldwide assets. The South African courts deem that ordinarily resident is described as: living in a place with some degree of continuity, apart from accidental or temporary absence. If it is part of a person s ordinary, regular course of life to live in a particular place with a degree of permanence, he/she must be regarded as ordinarily resident the place where his/her permanent place of abode is, where his/her belongings are stored, which he/she leaves for temporary absences and to which he/she regularly returns after these absences a residence that is settled and certain and not temporary and casual where a person normally resides, apart from temporary/occasional absences. A person will not be taxable in South Africa on any income that accrued from a source outside South Africa prior to the date on which he/she becomes ordinarily resident in South Africa, unless such person is regarded to be a resident by virtue of the physical presence test at the time the income accrued. Physical Presence Test This test states that if an individual is not classed as ordinarily resident they may be regarded as a South African resident for tax purposes if they are physically in South Africa for a period exceeding: 91 days in aggregate during the year of assessment under consideration; and 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and 915 days in aggregate during the above five preceding years of assessment. All three requirements above have to be met before a person will be regarded as resident. Partial days are also counted. ESTATE DUTY Estate duty is payable on: the worldwide estates of deceased persons who were ordinarily resident in South Africa any assets held in South Africa by those persons who are not ordinarily resident. 6

7 Income Tax Income tax is payable once the appropriate threshold has been exceeded at progressive rates, determined for each year of assessment. The tax payable is then reduced by certain rebates, details of which are to the right. For 2018/19, the thresholds before which income tax is payable, are as follows: Age Below age 65 78,150 Age 65 to ,000 Threshold in ZAR Age 75 and over 135,300 Income Tax rates Taxable income (ZAR) TAX PAYABLE 0 195,850 18% 195, , , , , , , , ,311 1,500,000 1,500,001 and above 35, % of the amount above 195,850 63, % of the amount above 305, , % of the amount above 423, , % of the amount above 555, , % of the amount above 708, , % of the amount above 1,500,000 Rebates* available REBATES Primary rebate (individuals under 65) PLUS Secondary rebate (for individuals 65 and over) PLUS Tertiary rebate (for individuals 75 and over) AMOUNT (ZAR) 14,067 7,713 2,574 * Known as a personal allowance in the UK. 7

8 Income Tax (continued) Capital Gains Tax (cgt) The assessment of whether somebody will be taxable on a gain they ve made on an investment is based on calculating the true profit or loss. This includes: any currency gain or loss on disposal of an asset deducting any exemptions/exclusions, allowances, or losses. There is an annual exclusion of ZAR 40,000 (2018/19) for individuals. Subtracting the aggregate losses from the aggregate gain, results in the net capital gain amount. The amount of taxable capital gains to be added to income for the year 1 March 2018 to 28 February 2019 is 40% of the gain. This is known as the inclusion amount and reduces the effective rate of tax on capital gains for top rate income tax payers to 18%. Donations Tax (applicable to residents only) Donations tax is levied on property gifted by individuals each tax year above ZAR 100,000. The tax is levied at a flat rate of 20% on the value of donations up to ZAR 30 million and at 25% on the amount exceeding ZAR 30 million. The donor is liable for payment of the tax but donations between spouses are exempt. Estate duty Estate duty is levied on the worldwide property of South African residents and on the South African property of non-residents. The estate of the deceased is liable for payment of the tax. The estate value can be reduced by ZAR 3.5 million to arrive at the taxable amount. Estate duty is then levied at a rate of 20% on the first ZAR 30 million and 25% on the estate value above ZAR 30 million. Your financial adviser will be able to explain this in more detail. 8

9 How does an Old Mutual International Offshore Bond help with tax efficiency? By investing in an offshore bond, whether it is standalone, in trust, or within an international pension plan, there is an opportunity for you to maximise your pension s potential by mitigating tax, investing in a hard currency of your choice and having a wide range of investment options. Standalone Old Mutual International Offshore Bond The bond is taxed as a capital asset, so it is liable to capital gains tax should you make a withdrawal or surrender it. A maximum effective rate of CGT of 18% applies. If you are considered ordinarily resident when you die, the bond will be within your estate for estate duty purposes. Old Mutual International Offshore Bond held within trust The bond is taxed as a capital asset, so it is liable to capital gains tax should the trustees make a withdrawal or surrender it. A maximum effective rate of CGT of 36% applies with the exception of special trusts, e.g. for disabled beneficiaries or bereaved minor situations. No donations tax is payable on donations up to the annual exemption of ZAR 100,000 (2018/19) to trustees. The tax is levied at a flat rate of 20% on the value of donations up to ZAR 30 million and at 25% on the amount exceeding ZAR 30 million. Old Mutual International Offshore Bond held within an international pension plan The bond is not taxable within the international pension plan. Income and gains that accumulate in the bond are not taxable on the individual. A South African resident is only taxable when pension benefits are taken from the international pension plan. Contributions, which are not taxable, are paid out before taxable growth. Assets or cash invested into your international pension plan will not be subject to estate duty or donations tax. Once within a trust, the money/investment is not included within the estate of the person putting the money/investment into trust (the donor/settlor) so will not be liable to estate duty on death. 9

10 case studies Case Study 1 Andre is 45 and works as an IT specialist in Dubai and lives with his wife of 10 years, Sarah. They have one child, Luke, who is eight years old. Andre is an ordinarily resident South African who left South Africa to further his career at 38 having worked in a number of countries and ending up in Dubai. Andre never built up a pension in South Africa and doesn t want to contribute significant money to a pension in any particular jurisdiction as his employment involves placements in different countries depending on the contracts his employer secures. He is thinking about how to fund his retirement when he plans to move back to South Africa. His financial adviser recommends he opens an international pension plan in Guernsey, with an Old Mutual International Offshore Bond as an underlying asset. He has selected a retirement age of 60 and makes an initial contribution of 240,000 AED (UAE Dirham) with the intention of adding further top ups of similar values on a regular basis. He hopes to contribute enough to provide a fund of 3m AED in 15 years time. At age 59, Andre returns to South Africa with Sarah and takes up part-time work and plans to supplement his income of ZAR 300,000 by drawing from his international pension plan from his birthday next month. At this time, his plan has grown virtually tax free to 2.78m AED. Due to the flexibility of the international pension plan, Andre can choose to tailor any income from his plan to meet his needs year on year. He can also take lump sum ad hoc withdrawals to fund larger purchases/holidays etc. Withdrawals of original contributions are free from tax. After this, as the pension is invested in an offshore bond, gains are chargeable only to CGT, which is effectively 40% of Andre s income tax rate. As the international pension plan is written under a trust, the value is not considered to be within his estate for estate duty purposes leaving him free to pass the international pension on to Sarah without any further tax planning. Please note: That whilst Case Study 1 uses an international pension plan in Guernsey, Old Mutual International does not recommend any jurisdiction or provider. Both case studies are fictitious and for illustrative purposes only. With the help of your financial adviser, you should satisfy yourself regarding the suitability and integrity of any particular international pension plan and its provider. 10

11 Case Study 2 Emma, who is not from South Africa, is 50 and is married to Brent, a South African expatriate, who has retained his ordinarily resident status. Emma inherited a significant sum recently following the death of her mother and is looking for some advice on how to invest this sum. Brent always planned to return to South Africa and Emma has agreed that they can now do this. As Emma and Brent will return to South Africa for the long term, Emma is worried about how her inheritance might be taxed in South Africa during her lifetime and on her death. Her financial adviser recommends investing in an Old Mutual International Offshore Bond based in the Isle of Man, prior to moving to South Africa permanently. Once resident in South Africa, the investment in the Offshore Bond will enjoy virtually tax free growth, optimising the returns on the investment. Any money taken from the bond will be seen as capital rather than income and any gain is taxable at 40% of her income tax rate. On Emma s death, the Offshore Bond will not be liable to South African estate duty even if left to someone other than Brent, as it is situated outside of South Africa and was taken out prior to becoming ordinarily resident. Brent invests his own savings in an Offshore Bond with Old Mutual International. This is subject to CGT in the same way as Emma, but remains in his estate for estate duty purposes. SUMMARY As you can see, before moving to South Africa, reviewing the structure of your investments and pension funds can be extremely worthwhile to ensure that they: are as tax-efficient as possible, with opportunities for growth can meet your retirement income needs are invested securely in a currency that may experience less volatility are well-structured to provide a legacy to your loved ones. Speak to your financial adviser about how an Old Mutual International Offshore Bond (potentially in conjunction with an international pension plan) could help you to get the most out of your retirement savings. 11

12 This document is based on Old Mutual International s interpretation of law and tax practice as at May We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change. The value of any tax relief will depend on the investor s financial circumstances. Old Mutual International cannot accept responsibility for any losses or liabilities arising from actions taken as a result of the information contained in this document. Full details of the products available from Old Mutual International can be obtained from your financial adviser. This document was last updated in May Please confirm with your financial adviser that this is the most up-to-date document for your product or servicing needs. Your investment may fall or rise in value and you may not get back what you put in. Please note: the case studies in this document are fictional and used purely to illustrate possible real-life scenarios. Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual International Isle of Man Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0) Fax: +44 (0) Licensed by the Isle of Man Financial Services Authority. Old Mutual International Isle of Man Limited is a member of the Association of International Life Offices. Old Mutual International is registered in the Isle of Man as the business name of Old Mutual International Isle of Man Limited. Old Mutual International Ireland dac is regulated by the Central Bank of Ireland. Registered No Administration Centre for correspondence: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU Tel: +353(0) Fax: +353(0) Registered and Head Office address: Hambleden House, Lower Pembroke Street, Dublin 2, Ireland. VAT number for Old Mutual International Ireland dac is S. Old Mutual International is registered in Ireland as a business name of Old Mutual International Ireland dac. SK12923/INT /May 2018