The rules are changing. In 2021 the formal process of financial emigration through the South African Reserve Bank will be phased out. What does this mean? It means that South Africans who move abroad will no longer be able to use financial emigration as a way to trigger the early withdrawal benefit on retirement savings like pensions and annuities. Let’s explore the retirement annuity withdrawal rule changes coming 01 March 2021.
What happens to my Retirement Annuity (RA) if I emigrate?
South Africans who have completed the process of formal emigration with the South African Reserve Bank in order to have their status updated for exchange control purposes from “resident” to “non-resident” are currently able to withdraw their retirement savings in full, subject to lump sum withdrawal tax.
This was advantageous for expats because they could access their retirement funds early before the official retirement age, and once this money had been withdrawn it could be used for any legal purpose. This meant that South Africans often used their RA savings as a means to fund their international relocation or to study or invest abroad.
What changes are being made to South African retirement fund rules?
The Draft Tax Bill proposes that the payment of lump sum benefits from retirement funds should only be possible where a member of a retirement fund ceases to be a South African tax resident and such non-residency has been maintained for at least three consecutive years. The effect of the 3-year rule is that members of retirement funds who emigrate will have to wait for a period of at least three years before they are allowed to cash in their retirement savings.
After 1 March 2021, once the amendments kick in South Africans who emigrate will be made to wait three years before they can access and withdraw their retirement funds early. However, it will be on you as an expat to prove that you have been tax resident in another country for the required period, and you will also need to show that you’ve been physically absent from the Republic for this period as well. Once you’ve satisfied the South African Revenue Service that you are no longer a tax resident because you have made your tax exit from the country, you will be allowed to access your retirement savings.
What does this mean?
- For South Africans already permanently living abroad, this isn’t as bad as it sounds. There’s a chance that you could already qualify as a non-resident for tax purposes in South Africa. As such, you would be able to access retirement funds after 28 February 2021 as soon as you have been non-resident for three consecutive years.
- For South Africans still planning to leave the Republic in the next year or so, the rule changes won’t be as well received. After 01 March 2021, you will be made to wait three years to access any pension preservation fund or retirement annuity, unless you manage to submit your exchange control emigration application to the South African Reserve Bank before 28 February 2021.
But wait. Before you make any hasty decisions, it’s important to consider all the angles and there are major tax implications either way. Early withdrawal of your retirement funds will be subject to tax at a much higher rate than if you made the withdrawal after retirement, while ceasing tax residency comes with a deemed capital gains tax liability.
FinGlobal: retirement annuity withdrawal specialists
If you need help weighing up your options to make your next move, it’s a good idea to get expert, impartial advice. That’s where we can help. Our team of international financial planners, tax experts and foreign exchange specialists offer objective advice based on your unique circumstances in order to help you make the best possible decisions for your financial future.
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To find out more about our cross-border financial solutions for South African expats, contact FinGlobal today!