NEWSROOM
How Much Should You Invest Offshore?
It’s a question we hear often, “How much should I have offshore?”. While it may be easy to have 40% or 50%, the amount you choose to invest offshore requires considerable thought and may differ vastly from person to person.
The South African stock market makes up 83% of the $1.3trn combined market cap of the African continent, 15 times larger than the second largest stock market (Casablanca). The South African economy is however only 0.44% of the global economy in 2023, so a healthy offshore exposure is needed to fully diversify your investments.
The Rand depreciates against major currencies at around 3.5% a year (average over the past 40 years). This is called Purchasing Power Parity (PPP), which is basically the difference in the cost of goods over time.
This currency depreciation may seem like a one way bet, and the Rand has traded weakly for around 10 years, but there are times when it can strengthen significantly too, from 2001 to 2005 the Rand strengthened 57%. If you are looking at your returns in Rands, that’s a big drop over a 4-year period, just on the currency alone.
Since 2010, global shares have done much better than SA ones, and the Rand has weakened at a higher than average 6.5% a year.
Offshore returns from 2000 to 2010 were however very different. Global shares significantly underperformed SA and the currency strengthened at an average of 4% a year. Depending on the timing, you could have had a -40% return in Rands over a 9-year period.
There are two ways to invest offshore, by taking money offshore, or by investing in offshore assets, but in local currency. South African tax residents can take R11 million per year offshore, so an offshore kitty of substantial size can be built up relatively quickly. The investment may only be made in the name of the taxpayer who externalises the funds and you are taxed on worldwide assets so any income or capital gains in offshore assets are taxable in South Africa.
Retirement products, like Pension funds, Provident funds, Retirement Annuities and Preservation funds are allowed up to 45% invested offshore, but in Rands. These investments are usually long term focused and being 35%-45% offshore within these products is often appropriate. Living Annuities are also only Rand based, but you can get up to 100% offshore within them, if the product provider can accommodate it.
If your marginal tax rate is above 30%, it may make sense to invest offshore within an endowment, where the tax will be handled for you, at a lower rate, and save on future executor’s fees if beneficiaries are nominated.
If you want to separate your assets from yourself and plan for future generations, an offshore trust is an option. An offshore trust can be expensive to run and generally requires a higher level of compliance in many jurisdictions, so we generally only recommend them for amounts over R20m. South African trusts cannot take money offshore, but can inherit offshore investments with approval from the South African Reserve Bank.
Offshore investments are usually held for long periods of time, averaging 20-40 years, and with the range of outcomes that you can expect due to changes in the underlying assets as well as changes in exchange rates, a long-term mindset is vital.
So, how much should be offshore? Theoretically, you should try to match the portion of your living expenses that are imported to your ratio of offshore investments, but this is not an easy task. South Africans most imported goods are fuel, followed by electronic equipment, cars, medications and cosmetics. You could have the majority of your investments offshore, while remain living in South Africa and many people do this. You just need to be comfortable on the risks on currency fluctuations and different market dynamics between local and offshore markets.
Our job as advisers is to identify and evaluate your offshore needs to best suit your circumstances, considering the size of your investments, your ability to stomach larger ups and downs in your investments, where you and your beneficiaries live and spend your money.