Foreign pensions: An effective tool for global wealth diversification and asset protection

Source: Supplied. Rex Cowley, director and co-founder of Overseas Trust and Pension (OTAP).

Here, Rex Cowley, director and co-founder of Overseas Trust and Pension (OTAP), explains why contributing to an international pension fund is about far more than just saving for retirement:

Beyond retirement savings, international pension funds serve as a strategic tool for wealth preservation, offering access to hard currency and global financial markets without the complexities of cross-border tax and legal implications. In particular, foreign pensions help mitigate foreign situs risks and facilitate the seamless succession of wealth, ensuring financial security for future generations.

For South Africans looking to take advantage of an international pension, they can contribute funds from within South Africa and have these funds offset against their exchange control allowances, for example, their discretionary allowance and/or investment allowance.

Since contributions are discretionary, there is no obligation to continue funding foreign pensions. Therefore, clients can contribute as and when they wish, subject to their exchange control limits. Where a client already has externalised funds, these funds can simply be contributed to with no further obligations to the South African Reserve Bank.

Benefits

As with all pension schemes, foreign pensions will also pay benefits once the member reaches retirement age. These benefits typically include annuities and/or lump sums, which can allow for the full encashment of the pension. This makes international pensions highly flexible, as there are no mandated limits, unlike with domestic pensions in South Africa, however, where there is no tax relief on the contribution.

On the passing of a member, the assets in the foreign pension are paid as a death benefit to the beneficiary or beneficiaries, which ensures a seamless transfer of wealth without the complexity of foreign wills or foreign taxes that apply to foreign assets and accounts, such as bank accounts and share portfolios, for example.

Asset protection

International finance centre, Guernsey, has a highly regulated environment and robust pension legislation that provide multiple layers of protection for pension assets. This exceptionally strong regulatory framework safeguards accumulated pension funds from catastrophe risk, extending to any claims against an individual’s personal estate, regardless of the claimant’s status—whether an individual, a corporation, or a government. This offers ultimate peace of mind to members of foreign pension schemes.

Efficiency

Foreign pensions, like domestic pensions, typically provide an environment for tax-efficient growth, as the growth in the pension or investment income only gets taxed at the point when such income is paid to the member. This means that investment portfolios can be run very efficiently with a member benefitting from tax deferral until the point of benefit.

On the death of the member, the pension scheme mitigates foreign death duties and situs taxes, which otherwise could be payable in territories where the investments are registered. Furthermore, foreign pensions also dispense with the need for a foreign will and, as such, foreign probate does not apply.

This eliminates the administrative burden and costs that are typically associated with the transfer of foreign assets on the death of an individual. Taxation of benefits will depend on various factors and the law prevailing at the time of the member’s death.

A boon for South Africans abroad

For South Africans who work abroad and contribute to a foreign pension scheme in respect of services rendered outside of the Republic, these individuals enjoy full tax exemption when these pensions are paid in South Africa under the current tax law.

In summary, foreign pensions are not a replacement for domestic schemes, but are rather a valuable tool to complement an individual’s financial plan. Additionally, they offer significant efficiency, as they mitigate foreign tax liabilities, which means that a member of an international pension only has to consider their South African tax position, and under certain circumstances, such foreign income enjoys full tax exemption.

Lastly, foreign pensions clearly have a role to play where clients are looking to invest abroad in a safe and efficient manner. However, there are many variations of foreign pensions, and they are offered from multiple jurisdictions, which can be confusing to clients and advisers alike.

Therefore, it is critical to ensure that the product provider used is regulated in South Africa and abroad. This guarantees full compliance with the law and safeguards a client’s interests to ensure that the benefits sought will be realised.