At £50,000 ($59,521, €56,283), Select gives clients entry into OTAP’s pension, retirement, preservation, and trust products, including qualified non-UK pension scheme. The firm said that the products provide a range of benefits, including the facilitation of wealth accumulation, income, asset protection, global portability, succession planning and tax efficiency.

The Select annual fees start at £495 per year and it provides advisers with access to a range of investment platforms, including an offshore bond, offering open architecture investment and multi-currency options.

Select also facilitates the use of structured investments, offers two investment accounts at no extra cost, and is now available to all advisers who have terms of business with OTAP.

Rex Cowley, director and co-founder of OTAP, said: “There is a growing market demand for access to international retirement products, including QNUPS, from clients who want to protect and consolidate existing assets.

“Many of these clients have been excluded from accessing appropriate international products due to cost or entry criteria. Select overcomes both these issues and enables advisers to use our products across a wider range of clients, letting clients enjoy the benefits of going offshore.”

The country will now become a “jurisdiction under increased monitoring” and countries will have to actively work with the FATF to address strategic deficiencies to counter money laundering, terrorist financing and proliferation financing.

South Africa now becomes the second G20 country to be on the greylist after Turkey were added in 2021.

FATF said on 24 February that South Africa had “made a high-level political commitment to work” with the body to strengthen the effectiveness of its anti-money laundering regime.

It added that since 2021 it has made “significant progress” on recommended actions to improve its system including by developing national anti-money laundering and counter terrorism financing policies.

The body said that South Africa will have to implement eight steps of a FATF action plan to get itself of the greylist.

International Adviser spoke with a range of firms to discuss how the greylisting will impact the South African advice and investment markets.

‘Good position’

Francis Marais, product director at Morningstar Investment Management South Africa, said: “What is perhaps a bit more obvious is the risk that greylisting poses to foreign direct investments, specifically from European countries. It is therefore imperative that South Africa address these weaknesses or shortcomings as identified as soon as possible. The longer the greylisting continues the worse these effects could be which would then inevitably feed through to asset class returns.

“South Africa is, however, in a relatively good position, when compared to some of the incumbents on the grey list and has already shown intent by addressing some of the concerns and weaknesses. Indeed, should the country not be greylisted, the two laws already passed, in record time, should put us on an even stronger footing going forward and re-establish South Africa as an important global participant in the world financial markets.”

Lindsay Bateman, head of business development at Brooks Macdonald International, said: “While the move wasn’t a surprise, it has resulted in an immediate depreciation of the South African Rand on global currency markets and has dealt a significant reputational blow to the country.

“In addition to the potential currency impact, the costs of conducting global business for asset managers, banks, and other financial intermediaries will be impacted. This is due to the need for ‘enhanced due diligence’ on factors such as the source of wealth and funds, as well as greater ongoing supervision. The country faces increased risks, including concerns about greater capital outflows, as well as higher transactional, administrative, and funding costs, particularly in the banking sector.

“The listing is expected to be challenged for review in June and since many financial firms will initially bear additional expenses, the immediate influence on international financial transactions may be subdued.”

Rex Cowley, director at Overseas Trust & Pension, said: “The grey listing of South Africa is very unfortunate given the efforts taken by legislature, administrative bodies, and other authorities to address the issues identified in the 2021 mutual evaluation report. The grey listing will increase the administrative burden on the average person and all foreign provider of accounts to South Africans.

“Whether these costs are passed on or not time will tell but it is a far from desirable position. What seem unfair is that the majority of impact will be on the joe public when the drivers for the grey listing had nothing to do with them, and comes from state corruption, associated criminal activity and failures to convict or address perpetrators.”

Impact for intermediary market

The country is set for more disturbance, but what does this mean for South Africans who may be concerned about their investments, pensions and overall financial planning?

Michael Yuille, managing director at Northern Cross Wealth Management, added: Well, the immediate effect is that South African companies and individuals that trade or invest internationally will be subject to enhanced due diligence, which will add complexity and costs to these transactions.

“In addition, the likelihood is that the Rand may depreciate further against major international currencies, such as the US dollar and British pound.

“This, in turn, will make trading and investing internationally more expensive for South Africans, and may dissuade people from diversifying their portfolios into overseas markets, which should be one of the fundamental aspects of a truly diversified investment portfolio. South Africa clearly has a plan to be taken off the grey-list, it is now a question of how quickly it can be implemented.

Rashay Makan, managing director at Carrick Wealth South Africa, added: “Carrick Wealth are expecting increased transaction costs from international fiduciary, life, platform and investment providers. In addition, clients can expect increased scrutiny and enhanced due diligence, particularly surrounding source of wealth.

“These enhanced due diligence processes will certainly add to the overall transaction costs and increase processing turnaround times for clients.”

The paper proposed to introduce a government-run social security fund that would have allowed people to receive retirement, survivor, disability and/or unemployment benefits. Contributions would have been based on a person’s income and wealth, with different bands and benefits provided accordingly.

But the government gazetted the green paper to “provide better clarity on some of the matters entailed [in it]” as some of the technical aspects of the proposals were not well understood and many have misrepresented the proposals, particularly on the National Social Security Fund.

International Adviser spoke to Holborn Assets and Overseas Trust and Pension to discuss how the social reforms will impact high net worth taxpayers and the South Africa pensions market.

Necessity?

The original plans for the proposed social security system was originally going to be made up of four tiers:

• Tier 1 will be available to everyone and will be non-contributory;
• Tier 2 will be mandatory with contributions up to a certain threshold and will pay out retirement, death and disability benefits;
• Tier 3 will be phased in via an auto-enrolment model providing approved retirement funds benefits, including annuities; and,
• Tier 4 will be voluntary with contributions securing private savings and insurance benefits.

South Africa has many political issues but are the reforms necessary in the retirement and pensions market?

Mark McAllister, senior partner at Holborn Assets, said: “There is a huge wealth divide in South Africa sadly created through the legacy of apartheid, compounded by corrupt mismanagement by successive ANC governments.

“Rather than tackle the issues at hand, generating real wealth through freeing entrepreneurs to drive the economy, these socialist policies are only exacerbating this wealth divide. Though the idea makes sense, it’s like providing a fish for a day rather than empowering more fisherman who can self-sustain if governance was better and with less red tape.”

Rex Cowley, director at Overseas Trust and Pension, added: “The informal sector, which are low-income earners and represent around 18% of the population, means a high level of vulnerable people are not participating in pension and relying on government grants in retirement.”

More taxes?

The hits keep on coming for South African taxpayers. Economic struggles, compounded by covid lockdowns and a dwindling tax base, have driven hundreds, if not thousands, of people to consider moving out of the country.

And if the National Social Security Fund (NSSF) is introduced, taxpayers will face another blow. The original NSSF plans wanted all employers and employees to contribute between 8% and 12% on qualifying earnings up to a certain limit.

This could turn away the high net worth population who already feel aggrieved about paying high sums of tax.

McAllister said: “The taxpayers are already alienated, when you add on the costs of private education, security, pensions and medical aid due to poor service delivery – South Africa is one of the highest effective costs of living countries in the world.

“Expecting them to fund further social policies as a result of misspent public funds whilst ex-ministers enjoy the proceeds of corruption unchallenged underlines why so much wealth is leaving the republic.”

Cowley added: “Pension is a matter of social security and as such mandatory contributions for employers in this sector, via the social security system, which is well developed in South Africa, could easily be sued to cater for the informal sector.

“As such, there is no need to introduce forms of indirect taxation but rather a mandatory pension contribution as part of social security provisions which are mandatory under SA law.”

Changes to the reform plans

The Green Paper on Comprehensive Social Security and Retirement Reform was gazetted because some areas of the proposals needed further clarification to avoid any further confusion.

Overseas Trust and Pension’s Cowley said that the South Africa government should not “meddle with the existing environment for pensions as this is working well be it personal provision or occupational provision”.

“Rather consider introducing a compulsory pension contribution for all employed people where an occupational scheme is not available,” he added. “Such contribution either going into personal plan or new government fund and funded by the employer and an option for the employee to also contribute.

“However, this would need a phased introduction starting at a low rate of contribution of circa 2% and progressively increate to 8% over a number of years so as not to create unnecessary financial difficulties for employers.”

Holborn Assets’ McAllister added: “Sadly, we can’t see a scenario where it would work as intended with the current lack of investment in the private sector to provide jobs and real economic growth.

“It will more likely provide more opportunities for mismanagement and corruption to the detriment of the nation and the people of desperately need this help.”

Passing the bill

The South African government said that, after discussing the reforms with a variety of sectors, it will release a second version of the green paper as soon as its teething issues have been addressed.

Then it will look to pass the bill, which according to Cowley and McAllister is unlikely to make changes to the issues facing South Africa and its citizens.

Cowley said: “The issue in the information employment sector will not change unless there is intervention, and the government grant and old age pension is not sustainable, so something has to be done to address this. Hopefully a more thought-out version will emerge in time.”

McAllister added: “Due to the African National Congress retaining a majority it’s likely this bill will be passed in some format – leading to a replication of the similar policies, like national insurance in the UK.

“However, South Africa is more reminiscent of the UK in the dark socialist days of the late 70’s than its current G7 leading nation status. Many remember the excessive power of the unions, three-day week and rolling black outs.

“South Africa is a similar scenario and needs an economic reformist to transfer the economy to reward those willing to work hard and build the economic success of the country. Without that kind of thinking it will continue to slip further and further towards the Zimbabwean failed state than a Singaporean style powerhouse.”

This came during the finance minister Tito Mboweni’s budget speech on 24 February 2021.

It will focus on wealthy taxpayers with complex financial arrangements.

The unit will initially be co-located within the large business and international taxpayer segment.

Sars said that it will be assessing wealth “derived from multiple sources” and these individuals “employ complex, and often offshore, financial arrangements”.

The first group of taxpayers have been identified and will receive a letter during April.

Industry response

Rex Cowley, co-founder of Overseas Trust and Pension, said: “These provisions help Sars get a better understanding of and address arrangements that erode the tax base or shift profit out of South Africa.

“Sars will have gathered a lot of data since 2016 on the kind of structures and transactions used which may contravene anti avoidance rules. As such the establishment of a dedicated unit to evaluate high net worths is not surprising and mirrors similar initiatives in the US and a number of European territories.

“The success of these units vary and whether or not they represent value to the taxpayer is questionable but they arguably create a visible deterrent.”

Mark McAllister, senior partner at Holborn Assets, said: “We hope instead of focussing considerable resources on South Africans putting their funds into legitimate offshore lifeboats, government should actually tackle the inherent issues from the top to bottom of the fiscal system.

“South Africa needs to turn a corner towards a Singapore style economic powerhouse and less like a Venezuelan failed state, in that scenario the government need not worry about off shore funds as the majority would want to invest in the future of South Africa and in rands, but only if good governance and a firm anti-corruption stance can be assured, something that feels like a distant dream for many.”

Changes

There were a number of changes in the South African budget, including:

• Applying tax on withdrawals of retirement funds when the member ceases to be a tax resident of South Africa;
• Increases to the small commutation of retirement annuities;
• The increase of the personal income tax brackets;
• Tax-free transfers between retirement funds; and
• The use of retirement interest to acquire retirement annuities.

The South African treasury had concerns that people who become tax resident in another country which has a double tax agreement with South Africa will pay tax in that country. This means that South Africa forfeits its rights to tax the former South African resident.

Denver Keswell, senior legal adviser for Nedgroup Investments, said: “It now intends to tax a retirement fund member when they no longer qualify as a South African tax resident. Their retirement fund interest will be subject to tax using the withdrawal table the day before they no longer qualify as a tax resident.

“If they chose to leave their retirement benefit in South Africa, then any tax payable will be deferred until they access their retirement interest. This will ensure that South Africa receives tax due. Treasury will use the relevant retirement tax table at the time of access and provide a tax credit on the calculated deemed tax.”

Also, Keswell added that currently members of retirement funds who retire early and decide to transfer to another retirement fund, will be taxed. But “treasury proposes allowing tax-free transfers for early retirees provided the transfer is to a similar or more restrictive fund”.

Economy

During the budget,  finance minister Mboweni said that the South African GDP had contracted 7.2% for 2020/21 financial year and the treasury has forecast 3.3% growth for the year ahead, before moderating to 2.2% for 2022 and 1.6% for 2023.

Maarten Ackerman, chief economist and advisory at Citadel, said: “While we did expect a better number than usual for this year, coming off the exceptionally low base of -7.2% in 2020, it was really hoped that with the right reforms, we could pave the way for stronger growth in the longer term. It is clear, however, that after a rebound in 2021, we are expected to drift back below 2% in 2023.

“This is enormously frustrating, as with the correct reforms we should really be able to kickstart the local economy. The muted 1.6% figure for 2023 is a number that we had become used to over the last five or so years, but given that it is in line with population growth, it will do nothing to fix our unemployment issues or the other socio-economic problems that the country is facing.”

Countries across the world will have to start paying off the massive debt they have accumulated over the past year – but, with the financial turmoil it experienced prior to covid-19, it could be a long road ahead for South Africa.

Local media reports in January said that the South Africa Treasury is, unsurprisingly, considering tax hikes to fund vaccines, with widening the budget deficit and reprioritising government spending among other options.

At the same time, the World Inequality Lab suggested that a ‘wealth tax’ could raise ZAR160bn (£7.7bn, $10.9bn, €9bn) for the country.

South Africa is by no means the only country to consider such a step – for example, Argentina passed a one-off levy in December – but with such a small proportion of the population paying the majority of taxes – further burdening them could be a step too far.

International Adviser spoke to several advisers to discuss what the future holds for South Africa and how the coronavirus bill will be paid.

Wealth tax?

The idea of a wealth tax has been met with mixed reactions.

Mark McAllister, senior partner at Holborn Assets, said: “South Africa has been limping on as an economy for many years, sadly impacted in particular by the corruption of the Jacob Zuma presidency.

“Taxes need to rise to make up the deficit and that was before a pandemic came along. With the pandemic it has simply compounded into an even bigger fiscal challenge and the likelihood of increased taxes and a one-off ‘wealth tax’ seem almost inevitable.”

Rex Cowley, co-founder of Overseas Trust and Pension, said: “Ultimately taxes will fund the vaccination programme. How will this translate into the existing system for taxation and levels of tax is, at this point, pure speculation albeit the cost of the vaccine is real and being dealt with through increasing government debt.”

A spokesperson for Sanlam added: “Wealth taxes bring administrative difficulties; they may not raise much revenue, could cause cash flow difficulties and may cause capital flight.

“Nonetheless, a wealth tax may be considered as a means to promote solidarity in response to South Africa’s high level of income inequality. Given the wide range of factors to consider in implementing a wealth tax, it is not clear when such a tax will be introduced, if at all.”

Impact on clients

The first thought for financial advisers on hearing potential tax rises should be clients and how they will be affected.

Anthony Palmer, group commercial director of Carrick Wealth, said: “Taxes are a major consideration for South Africans.

“Any increase in taxes will result in more people seeking financial advice to ensure their affairs are optimised.”

McAllister added: “To say that wealthy South Africans are fed up is an understatement, increasingly the wealthy are leaving the country in droves, exhausted and chased away by first world taxes with a third world quality of life.

“Many pay for their own private security, medical care, schooling and long-term investments with expensive state infrastructure subsidised by a tiny fraction of the population.

“Rightly so, many are questioning whether they receive fair and equitable value for the rising taxes they experience.

“As a result, many are now looking at how their wealth is structured and increasingly looking to offshore solutions to outperform the anaemic lack of growth in the Johannesburg Stock Exchange over recent years and consistent rand depreciation over the last 10 years, many clients are simply poorer each year in dollar terms.”

Long-term troubles

Taxes are the go-to initiative when it comes to funding or paying off debt. But sometimes they are not enough to solve the long-term issues of the country.

A spokesperson for Sanlam: “We appear to be at the point where continued tax increases can be expected to weaken economic growth further, with a negative feedback loop to the government’s financial position.

“The government is already absorbing a large share of available resources and crowding out private sector investment, which lowers the potential growth rate and South Africa’s ability to deal with the pandemic.”

Overseas and Trust Pension’s Cowley added: “ Its less about the amount of taxation and more about how taxes are deployed.

“The South African government has identified the cost of corruption and is trying to deal with this and many of the inefficiencies in the government run enterprises are also on the agenda. Such savings are thought to run into the hundreds of millions and if addressed satisfactorily over time could reduce the burden on the tax payer.

“I believe the more important question is how will the Government stimulate economic growth through tax incentives to businesses to employ people and create jobs post-covid.”

Holborn Assets’ McAllister said: “Taxes will inevitable rise to try and pay down the deficit but it’s the lack of economic growth that is the number one concern.

“The biggest missing piece of the puzzle is a coherent business focussed agenda to drive small and medium private enterprise to fill the void caused by a bloated state, failing state owned enterprise and ongoing corruption issues.”

How can advisers help clients?

With the economic picture starting to become clearer, what can advisers do to help clients deal with the upcoming changes?

Carrick Wealth’s Palmer said: “Ensure their financial plans are up to date, including Wills. Ensure the way they hold their investments is the most efficient structure available and best to meet their needs. Also, ensure their investments are correct for their respective risk profiles and they are receiving value for the fees they are paying.”

Cowley said: “Often the focus is on investment, but these difficult times require a greater focus on liquidity and risk management in order to deal with ensuring sustainable cash flow or access to personal capital to deal with economic further shocks.

“The use of tax relieved saving options is also clearly something advisers should be getting clients to focus on.”

A spokesperson for Sanlam added: “Now more than ever, South Africans need appropriate advice, support to remain on track with their long-term financial plans and guidance in terms of navigating the financial challenges they may be faced with.

“During this period, advisers should help clients through empathetic, knowledgeable, and in-depth service. While this is our normal ethos, these unusually challenging times require advisers to be more empathetic and supportive, while providing excellent service and most appropriate advice.”