Accessing your retirement funds when you emigrate

accessing retirement funds

Accessing your retirement funds when you emigrate

If you are planning to move abroad, accessing your retirement funds may prove to be more challenging from next year. Retirement funds form a major part of an investment plan for many South Africans. Investors benefit from tax-deductible contributions and enjoy tax-free interest, dividends and capital gains on investment growth. For this reason, retirement funds have always been a savvy investing tool. But the rules are about to change when it comes to emigration.

The 2020 draft Tax Laws Amendment Bill (TLAB) was published by National Treasury and the South African Revenue Service (SARS). This draft looks to add an additional hurdle for South African residents looking to take their retirement funds abroad. This change restricts South Africans who have financially emigrated from withdrawing their retirement funds until 3 consecutive years have passed. After this 3-year period, an individual can prove that they are a non-SA resident for tax and exchange control.

For the purpose of this article, retirement funds refer to (1) pension preservation funds, (2) provident preservation funds, and (3) retirement annuities.

Current rules and regulations on accessing your retirement funds

In South Africa, retirement funds are governed by various Acts including the Pension Funds Act 24 of 1956 and the Income Tax Act 58 of 1962. These Acts make provision for accessing your retirement funds under the following circumstances:

Early withdrawals (prior to age 55)

  • Pension preservation fund / provident preservation fund members may make a once-off partial or full withdrawal from the investment.
  • Retirement annuities with a value below R7,000 can be accessed in full.
  • Members may be able to retire early from their retirement funds due to ill health.

Remember: accessing your retirement funds early is typically discouraged and is therefore subject to a higher tax rate.

Retirement (from age 55)

  • Pension preservation fund / retirement annuity members may redeem a maximum of one-third of the investment as a cash lump sum. The remaining two-thirds must be used to purchase a living annuity or life annuity in South Africa.
  • Provident preservation fund members are allowed to redeem the full investment as a cash lump sum.

All retirement withdrawals are subject to tax. The rates are more favourable with an official retirement in comparison to early withdrawals.

Emigration

Under the current provision of the Income Tax Act, a person is allowed to withdraw their retirement funds where that person “is (or was) a resident who emigrated from the Republic and that emigration is recognised by the South African Reserve Bank for purposes of exchange control”.

Essentially, the above stipulation allows a person to withdraw their retirement funds once they have undergone the process of financial emigration. Financial emigration refers to ending your residency status with the South African Reserve Bank (SARB) and SARS.

Proposed legislative change to accessing your retirement funds

The 2020 draft TLAB looks to amend the definitions under the current Income Tax Act as follows: a person is allowed to withdraw their retirement funds, where that person “is (or was) not a resident who emigrated from the Republic and that emigration is recognised by the South African Reserve Bank for purposes of exchange control for an uninterrupted period of three years or longer”.

This proposal aims to renew the processes around financial emigration by restricting access to retirement funds. You will now, under these proposed regulations, have to prove your non-residency after a period of 3 consecutive years. This idea was initiated in the February 2020 Budget Speech with the intention of introducing a new system from 1 March 2021.

What are your options?

The 2020 draft TLAB was made available for public comment until 31 August 2020. The amendments could be in effect as early as 1 March 2021.

Early withdrawals (prior to age 55)

  • Pension preservation fund / provident preservation fund members (with no prior withdrawals) will still be granted access to their retirement benefit, should the amendment be published, and can transfer the funds abroad.
  • Retirement annuity members wanting to access their funds will need to financially emigrate before transferring the funds abroad. If not done before the proposed amendment is published, they risk having their retirement fund tied up in South Africa for at least 3 years.

Retirement (from age 55):

  • Provident preservation fund members will be granted access to their full benefit, which can be taken abroad.
  • Pension preservation fund / retirement annuity members can access up to one-third of the capital, which can be taken abroad. Members wanting to access the full benefit will need to financially emigrate. On emigration, the benefit will be subject to a higher tax rate. If not done before the proposed amendment is published, they risk having their retirement fund tied up in South Africa for at least 3 years.

In summary, it is clear that these new amendments could be in effect within the next 6 months. Those who have left their retirement funds in South Africa will need to evaluate the tax implications of expatriating their funds or retiring in rands. If you’re considering financial emigration, we recommend consulting an emigration specialist to finalise this process as soon as possible. It often takes several months to complete, which could affect accessing your retirement funds.

 

Jason van der Westhuizen is a CERTIFIED FINANCIAL PLANNER® at Netto Invest.

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