Accessing your retirement annuity when you left South Africa used to be a simple process of financial emigration. In March 2021, a new law passed making it more complicated. Here are the steps you have to follow in order to have your retirement funds released to you before the age of 55.
What is a retirement annuity?
A retirement annuity (RA) is a tax-efficient investment that an individual contributes to instead of, or in addition to a pension or provident fund through an employer.
The basic idea behind an RA is that it will provide a guaranteed stream of income for you after retirement until your death. RAs are often funded for years in advance while you are working.
In South Africa, RAs are governed by the Pension Funds Act, which aims to ensure that the funds are managed correctly and that the appropriate risk levels are maintained. The act also stipulates strict rules in regard to accessing the funds.
Usually, an RA can only be encashed once you reach the legal retirement age of 55.
When you retire, you have the following options:
- If the value of the fund is less than R247,500 the full amount can be cashed out
- If the value of the fund exceeds R247,500, only one-third of the total value can be cashed out and the remainder will be invested in a pension fund (also called a living annuity) to provide a regular income for retirement
There are some exceptions that allow you to withdraw your retirement annuity before you reach the age of 55.
- If the total value of the RA is less than R15,000
- If the policyholder has suffered a permanent disability
- If an individual has tax emigrated from South Africa and has maintained this status for three consecutive years
It’s this last circumstance that is relevant to those who have immigrated and want to access the funds they have been saving for retirement.
Financial emigration vs tax emigration
In the past, all you had to do if you wanted to withdraw your RA from South Africa was to financially emigrate. Financial emigration was the process that expat South Africans used to officially declare themselves non-residents of South Africa with the South African Reserve Bank (SARB) for exchange control purposes.
This process was phased out in March 2021 and now whether an expat is considered a tax resident or not falls solely under the purview of the South African Revenue Service (SARS).
Since this change, in order to transfer retirement annuities out of the country, South Africans must prove that they have been tax resident in another country for three consecutive years. This is known as the three-year rule, which states that members of pension funds who emigrate must wait at least three years before claiming their retirement annuities. The reasoning behind this rule is that SARS has assurance that your intent to emigrate is substantiated and permanent, and you’re not just emigrating to access your retirement savings.
Tax emigration is the process of proving to SARS that you are no longer a resident for tax purposes and therefore not liable for any South African income tax on foreign earnings.
An important note: Individuals who have formally emigrated through the SARB only had until 28 February 2022 to encash their RAs under the “old FE” rules. If they have not done so, as of 1 March 2022 will need to follow the new Tax Emigration rules to encash. This means that if they have formally financially emigrated through SARB and left SA less than 3 years ago, they too will need to tax emigrate and wait out the three-year period.
To show that you are no longer tax resident, you must not meet the requirements of the South African tax residency tests of which there are two, the physical presence and ordinary residence tests.
The process of liquidating your RA
The process of liquidating your RA for the purposes of moving it abroad can be lengthy and convoluted. When you leave South Africa, these are the steps you’ll need to follow:
- Notify SARS that you have ceased to be tax resident. This is usually done via a tax return in the year that you cease to be resident, but it can currently be backdated with a manual submission.
- Submit a deemed capital gains tax calculation. When you cease to be tax resident, it triggers a Capital Gains Tax or an “exit tax” on worldwide assets held the day before your residency is ceased. This is only applicable for clients leaving SA with worldwide assets e.g., offshore property and offshore share portfolios.
- Proceed with the auditing process. A manual intervention on your submission may be done by SARS auditors who will assess your information in order to approve your non-residency status.
- Apply for your emigration Tax Clearance Status (TCS). Your tax compliance status as well as the source of funds you wish to transfer will need to be verified before they are allowed to be transferred abroad.
- Maintain your non-tax residency status for three consecutive years. If your tax residency cessation was backdated more than three years, you can immediately continue with the RA encashment process. If not, you will have to wait for three years before you can access your RA.
This is important and has created some confusion where some people believe they must wait three years from the rule change made in March 2021. This isn’t the case though. If, for example, someone left South Africa in June 2020, then in June 2023 they can make the application to encash their RA by demonstrating they have been tax resident in another jurisdiction for three consecutive years.
- Submit your RA withdrawal documentation. You can do this once the three years have concluded. When your tax cessation is approved, you must submit all the relevant documentation to the insurance company holding the policy.
- Wait for a tax directive from SARS. RAs are taxed when you cash them in, and the insurance company requires a directive from SARS to deduct the appropriate amount of tax before they can pay the net proceeds to you.
A new requirement that seems to be required more recently is providing a letter from SARS confirming the change of tax status to non-resident. These letters are taking some time to be issued by SARS and in some instances (depending on provider requirements) are causing delays in encashment of RAs.
- Transfer the funds. Once this process has been completed, the funds can be transferred offshore to a destination of your choice.
Our team of exchange control specialists can take the stress out of the process of transferring your RA out of South Africa. Get in touch on +27 (0) 21 657 2153 or firstname.lastname@example.org.
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