IPPs: Achieving Investment Choice and Protection for South Africans

IPPs: Achieving Investment Choice and Protection for South Africans

April 19, 2024

With a general election pending, South African residents and nationals await the next raft of changes to try and drive the economy forward. Following recent challenging times, many do not hold out much optimism.

Understandably, whilst there is a strong desire for South African individuals to see their country prosper, the uncertainties have led many to review and diversify their assets in the pursuit of greater security, certainty, and flexibility. One such way to achieve this is an Isle of Man (IOM) International Pension Plan (IPP), some of the advantages of which we will explore in this article.

Security and Protection

The IOM is a long-standing and stable offshore financial services centre, offering a flexible and robust regulatory framework for IPPs that has been in existence for almost 25 years. IPPs are authorised by the local regulator, the Isle of Man Financial Services Authority (IOMFSA), as international retirement benefit schemes. The scheme administrator, responsible for the management of the IPP, is also registered with the IOMFSA. As such, there is regulatory scrutiny and oversight of both the scheme and provider. Furthermore, the professional trustee to the IPP, generally the same company as the administrator (or another company within the group of the administrator), must also be approved by the IOMFSA. 

Within the regulations, there are specific rules and requirements for the IPP trustee and administrator, including (but not limited to) record keeping, appointment of professional advisers, contributions, investment matters, accounts and reporting.    

As the legal structure of the IPP is an irrevocable trust, there is further protection and assurance offered under IOM trust law, which obligates trustees to carry out their fiduciary duty in a professional and responsible manner, and to always act in the best interests of scheme members and their subsequent beneficiaries. The trust separates the legal ownership of the IPP assets (held by the trustee) from the right to use and benefit from the IPP assets (which remains with the member). Holding the IPP assets under trust provides further stability on the basis that the assets are held separate from the IPP provider’s balance sheet and therefore are protected and secure in the unlikely event that the IPP provider runs into financial difficulty.

Investment Options

IOM IPPs are generally structured as member-directed schemes, meaning the member directs the trustees in respect to investment decisions, either through their own self-directed investment mandate, or more commonly, by nominating an investment adviser/manager for the trustees to appoint. The trustees work in conjunction with the (appropriately licensed) investment adviser/manager to implement the desired investment strategy.

Typically, the trustees will have their own investment guidelines for the investment adviser/manager or member to adhere to, which set parameters around the types and concentration of permissible assets within a portfolio. The general over-arching principles are usually diversification, liquidity and suitability, to ensure the scheme fund achieves its sole or main purpose of being able to provide relevant benefits to members in retirement.

IOM IPPs are generally open architecture in respect to investments, which essentially means that the member can select from a wide range of underlying investment product providers and asset classes.

A South African Perspective

Importantly, from the perspective of a South African investor, an IOM IPP presents an effective opportunity to utilise their annual available foreign investment allowance of ZAR 1 million and/or the higher annual discretionary pre-approval allowance.

Once appropriate exchange control clearance has been granted, Rand can be converted into a hard currency, such as USD, GBP or EUR, for onward investment purposes. This provides improved stability for funds retaining their value as opposed to being exposed to a currency that currently and historically has been subject to sharp depreciations and fluctuations in value. Furthermore, within either the scheme bank account of the IPP and/or the chosen investment product, there will usually be the ability to make foreign exchange conversions as and when required.

In light of the political landscape and instability within South Africa, housing a portion of wealth within a well-regulated, reputable and stable offshore environment such as the IOM safeguards against sudden downturns in economic conditions. It also grants exposure to a wide array of international investment opportunities. As a result, rather than being restricted to the Johannesburg stock exchange for a large portion of the overall portfolio, the investment world opens up and improves the possibility of greater and more sustainable long term investment returns.

Table Mountain or the Materhorn?

Economists have been known to use famous landmarks to depict interest rate movements; the Matterhorn in Switzerland portraying a sharp move up in rates followed by a similar move down and, conversely, South Africa’s world-famous Table Mountain representing a long plateau at the peak. Putting interest rates aside, as a country, South Africa longs for a ‘flat-top’ period of reduced volatility and stability, mirroring its beautiful Cape Town landmark. In the interim, whilst much uncertainly still looms, an IOM IPP provides an excellent safe haven for investors’ funds, reducing risk and increasing investment flexibility so that wealth is not only preserved but enhanced for immediate and future generations.

__

Learn more about Freedom; Boal & Co’s IPP for South African’s residents

Read more about the advantages of Isle of Man IPPs for residents of South Africa in this case study.