How endowments can help avoid pitfalls when investing offshore
From opening a bank account in Ireland to owning a beach house in Mauritius, there are various ways you can invest directly offshore - but some options are riskier than others. A structure like a global endowment can help you avoid some common hazards.
Investing globally opens up a world of possibility for South African investors because it offers compelling benefits like geographical diversification , reduced emerging market risk, currency diversification and access to global opportunities.
There are several ways to start investing globally. Buying shares in a foreign company, depositing cash into foreign bank accounts and buying property abroad are all forms of global investing - but the implications of each of these methods can vary widely.
Most investors exploring their options will be confronted with the choice of whether to 'go DIY' by investing in offshore unit trusts or assets through a broker or a share-trading platform, or whether to invest using a product like a global endowment.
What is a global endowment?
An endowment is a structured investment product that helps you invest over the medium to long term. A global endowment invests in offshore funds, which then invest in specific assets (like Tesla stock or US Treasury bonds). Endowments are often referred to as wrappers because they're 'packaged' to come with estate planning benefits and tax-efficient structures.
Many financial advisers consider an endowment ideal for international investing, because the way in which they are structured neatly addresses many of the potential pitfalls of investing abroad.
Common pitfalls include complications relating to:
- Liquidity
Liquidity refers to the ability to convert your assets into cash quickly. This is tricky if, say, your wealth is tied up in a physical property abroad that, for whatever reason, you struggle to sell. Global investing is a medium- to long-term strategy, so investors should be prepared to stay invested for the full term, but it does help to have the ability to easily access your investments in case you really need to. Global endowments with multi-contract structures generally offer more flexibility, and thus, peace of mind that your wealth is easily accessible.
- Estate planning
Estate planning for international investments is far more complicated than for local investments because all kinds of country-specific regulations or laws can apply. Some countries freeze assets on the investment holder's death, making it difficult and costly for family members to gain access to them.
If you don't have an international will with the proper probates in place, you can also end up paying estate duty in another country, which can be as high as 45% to 60% of the investment value! Well-structured endowments can make succession much smoother and faster by simply letting you nominate a beneficiary in advance. This gives your beneficiaries less to worry about in a difficult time.
- Tax
Just because your money is offshore doesn't mean your gains aren't taxed. South Africa operates on a residency principle, which means no matter where in the world you're earning money, you're taxed for it 'at home'. If you have a direct investment, you are responsible for calculating and settling taxes for any offshore assets on your personal income tax bill, as per SARS regulations (which sometimes change). This can get quite technical.
You'll also need to pay for gains in foreign currency using rands - which means you'll have to pay capital gains tax (CGT) on any rand depreciation. Industry experts predict that the SA rand will depreciate over the long term by about 6% per year versus the US dollar, so this can really add up.
When you invest in a global endowment, on the other hand, tax calculations and settlements are done completely on your behalf, a far simpler and stress-free process. Your CGT is also generally settled in foreign currency, so you can avoid paying CGT on rand depreciation. Learn more on how global endowments are optimally structured for tax and estate planning.
Trusted professionals can help you weigh the pros and cons
The take-home point is that however you choose to invest globally, each approach and investment structure comes with its own risks and rewards. Foreseeing implications and navigating complications successfully is a task a financial adviser qualified in global investing can help you with, so don't hesitate to seek help. Learn more about the benefits of having a trusted financial adviser.
This article is not financial advice. Please consult a financial adviser for financial advice.
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Compelling reasons to invest in Discovery's Global Endowment
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Discovery Life International, the Guernsey branch of Discovery Life Limited (South Africa), licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on long-term insurance business. Discovery Life Limited is a registered long term insurer and authorised financial services provider. Registration number 1966/003901/06. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, is an authorised financial services provider. The views and opinions expressed in this article are for information purposes only and should not be seen as advice as defined in the Financial Advisory and Intermediary Services Act. Discovery shall not be liable for any actions taken by any person based on the correctness of this information. For full details on the products, benefits and any conditions, please refer to the relevant fact file. For tailored financial advice, please contact your financial adviser.