Understand the true nature of a foreign retirement product

A recent ruling by the South African Revenue Service (Sars) has highlighted the importance of aligning with a reputable offshore pension fund provider and understanding the tax and cost implications.

In the binding class ruling Sars found that the foreign pension trust in question was not a pension fund, provident fund or a retirement annuity fund, and therefore the benefits associated with a pension product would not apply.

Timothy Mertens, chair of Sovereign Trust SA, says it is important to note that this ruling (BCR 080) only applies to the applicant and the class members of the applicant, who are all undisclosed.

“If you are invested in a reputable international retirement plan there should be absolutely no issue whatsoever,” he adds.

Read: Sars pours cold water on offshore tax gimmicks

Sars also notes that the ruling is only binding between Sars and the applicant and the class members. “It does not constitute a practice generally prevailing.”

The ruling

A binding class ruling is issued in response to an application, in this case by a South African company, and clarifies how the Sars commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

The application for the ruling was made by the South African company, the founder of a foreign pension trust. The trust is a non-resident pension scheme constituted by way of a trust deed. The class is South African resident investors who will make contributions to the trust and become beneficiaries of the trust.

The ruling determined the income tax, capital gains tax and estate duty implications for resident beneficiaries of such a foreign pension trust.

Mertens says it will be an error to tarnish all non-resident pension or retirement products with the same brush (in terms of this specific ruling).

Facts pertaining to the trust

According to the applicant the trust was established in a foreign jurisdiction where its beneficiaries are potentially exempt from income tax on any annuities or lump sums paid to them, provided that the individual is not resident for income tax purposes in the foreign jurisdiction.

The specific pension scheme did not require the investor to purchase any annuity and there was no drawdown limit.

Investors could also take a loan of up to 50% of the fund value before normal retirement date.

Sars ruled that the trust was not a pension, provident or retirement annuity fund as defined in the Income Tax Act. It ruled, among others, that an investor would acquire a personal right against the trustees of the foreign pension trust when becoming a beneficiary of the trust.

The investor would acquire a vested personal right to the income and capital of the trust. According to the ruling the vested personal right will constitute “property” in terms of the Estate Duty Act and will then form part of investor’s dutiable estate upon death.

The ruling in this instance is binding for five years from July 2022.

The real benefits

“The primary and sole purpose of a retirement product should be for the provision of future benefits in retirement and not tax planning,” says Mertens. If there happen to be tax benefits for such products based on specific scheme rules or provisions in the Income Tax Act these are “ancillary” and subject to change.

Read: It’s official: Retirement funds can move 45% offshore

Mertens adds that the benefits of contributing to a foreign pension fund are numerous, but mostly include diversification of investment in the “literally thousands” of investment funds offshore that have the dollar, euro or UK pound sterling as their underlying reporting currency.

“These are generally much less volatile than the rand.”

“It also means that one can achieve some degree of stability for future retirement provision given that a foreign pension can also be managed in a stable, highly regulated and tax efficient jurisdiction such as Guernsey, Jersey or the Isle Of Man to name but a few.”

Read: South Africans in Guernsey, Jersey and the Isle of Man are low-hanging fruit for Sars

However, he advises potential investors to seek a proper tax opinion should they have any doubts about foreign retirement products.