If you’re a South African expat living abroad with retirement funds back home, pay close attention. Changes that were made to tax laws last year effectively seek to prevent South Africans who no longer pay tax in SA from withdrawing their retirement funds until they can prove they have ceased to be a tax resident for longer than three years. Wait. What? You heard right. The rules around retirement annuity withdrawals in South Africa are changing in 2021, and here’s what expats need to know.
South African Retirement Annuity Fund Rules
Can you cash in your retirement annuity early in South Africa?
Current position: Within the current retirement annuity withdrawal framework, taxpayers could only withdraw their retirement funds before the official retirement age if they had undergone the process of emigration for exchange control purposes, which saw their status change from resident to non-resident with the South African Reserve Bank.
New position: South Africans living abroad will need to show they have ceased tax residency for three uninterrupted years before they can access their retirement funds early. The proposed changes are scheduled to come into effect at the start of the next tax year, which is 01 March 2021 and affected retirement funds include, pension preservation, provident preservation, and retirement annuities.
What do the changes mean for early retirement annuity withdrawals?
As proposed in the Draft Taxation Laws Amendment Bill in July 2020, the retirement annuity withdrawal rules in South Africa will change so that expats with South African retirement annuities will no longer be able to immediately access and withdraw their savings when they finalise their formal emigration with the South African Reserve Bank. Instead a 3-year lock-in will apply to those funds in terms of which access to these funds is delayed for three years, after which the funds will be made available for withdrawal in full.
Is there still time for me to emigrate financially and cash in my retirement annuity early?
You’ll be cutting it fine, but it is possible. The rules only change in the new tax year, and our National Treasury has confirmed that all applications submitted for financial emigration to the South African Reserve Bank before 28 February 2021 will be processed in accordance with the current rules around early retirement annuity fund withdrawals.
This means that South Africans who are already living abroad still have a (very) small window of time to get their ducks in a row and submit their financial emigration paperwork. South Africans who are still planning to move abroad will be affected by the impending rule change, and will be obliged to wait out the period of three years before it is possible to prove that you have ceased tax residency.
What is the penalty for cashing in my retirement annuity before the policy matures?
Each insurance provider has different rules on penalties on early withdrawals. Depending on the product you chose, these fees vary between 0 – 30% of the policy amount, so check with your provider exactly what you’ll be charged before you make any decisions about cashing out early.
Do I have to pay tax on my early retirement annuity withdrawal?
Where there’s money, the South African Revenue Service has an interest. This includes any lump sum withdrawals you make from your retirement annuity.
When you withdraw your retirement annuity, you will be paid out the proceeds of your savings once SARS has taxed you. Here, you’ll want to pay careful attention to tax payable when you access your retirement annuity as a lump sum, because the higher your lump sum value, the more tax you’ll have to pay. This is because you fall into a higher tax bracket and according to the tax table that applies to retirement fund withdrawals the higher the amount, the higher the tax bracket. It’s also important to consider any previous withdrawals made, because these accumulate to push you into a higher tax bracket.
Learn more about how retirement annuity lump sum withdrawals are taxed by SARS.
FinGlobal: financial emigration specialists
If you’re looking for someone to put speed on your financial emigration application, FinGlobal is ready to help. We understand the need for haste with the deadline of 28 February 2021 looming around the corner if you’re looking to cash in your retirement annuity before your funds become tied up with the new retirement annuity fund withdrawal rules coming into effect in 2021.
So don’t delay; contact FinGlobal today. We’re waiting to handle every step of your financial emigration for you.