Question

I recently joined a company that has a group retirement annuity scheme. We all have our own retirement annuities, and the company pays the premiums with half of it coming off our income as a salary sacrifice.

I read a recent article of yours where you told us to look at the costs of investments. I have listed the costs below: 

These do seem high.

In addition to this, I see the broker is taking a fee of R69 every month when my R2 400 premium is paid.  He also receives an upfront fee of R6 290.

Answer

In South Africa, you are taxed on your worldwide assets so, should you pass away, the asset will trigger CGT and estate duty, regardless of whether you hold them in your own name or in a wrapper.

The location of the heirs will not affect this tax either.  However, having the investment in a wrapper will impact on the amount of tax that is payable.

What is a wrapper?

A wrapper is an insurance structure like an endowment policy or sinking fund where you can hold your assets.  It is a very useful instrument for offshore investments as they can do the following 

• Reduce your tax liability
• Make inheriting easier

Tax benefits

As the investment is in a wrapper, it will be deemed to be part of your South Africans estate.  You will therefore not have to pay for situs tax on the investment. Situs taxes like inheritance tax are typically around 40%.

Inheritance

A wrapper allows you to attach a beneficiary to the investment.  This means that your heirs will not have to wait until the estate has been wound up before they can access it. The investment  can be transferred to them immediately. This is a major benefit as estates are taking a particularly long time to be finalized in South Africa.

Having the investment in a structure also removes the need for your executor to have apply for a grant of probate.  A grant of probate is often needed to give your executor the authority to dispose of an offshore asset. This grant of probate usually adds an unnecessary layer of costs and time when it comes to finalizing your estate.

Insider tip

When you set up your investment wrappers, I would recommend that you set them up in such a way that you can have separate investments for each child. Some companies allow you to split the investments upon death while others will require you to set up separate investments at the start. Your financial advisor can advise you on which option you should be using.

If you keep your funds in a sinking fund, and the ownership of the sinking fund is just changed upon death, there will be no capital gains tax event triggered upon death.  This is a great way to build up offshore family wealth.

Once your children receive their inheritance, they may have to contend with inheritance laws in the country in which they live.  As your children are overseas, it is important that they understand the inheritance tax laws in that country.  All countries have different rules and regulations when it comes to inheritances and it is important that when they inherit, they receive the inheritance in the most tax efficient form.  This could be in the form of a cash payout or by taking ownership of the investment.

As you can see, a bit of planning ahead of time, can ensure that your offshore investments will be passed on to your children quickly and with the least amount of leakage in the form of taxes and fees.