Exchange control changes announced by the National Treasury in 2021 resulted in the phasing out of formal emigration through the South African Reserve Bank. There was some concern about this move, as formal emigration was used as a means for South Africans who had permanently relocated to access and cash in their retirement annuities early before the age of 55. Formal emigration previously allowed South African exchange control residents to change their status to non-resident thereby triggering the withdrawal benefit on their retirement savings. While many were worried that the phasing out of formal emigration for early RA withdrawal would leave their retirement money permanently tied up back in South Africa, this is not the case. Here’s what you need to know in 2022 about relocating from South Africa and cashing in your retirement annuity early.

Cashing in your retirement annuities in South Africa

A rose by any other name: formal emigration is out, tax emigration is in

South Africans who relocate abroad permanently are not left without a means to access their retirement savings from abroad. Now, instead of completing formal emigration through the Reserve Bank, South Africans must complete the process of tax emigration through the South African Revenue Service (SARS). This changes an individual from resident to non-resident for tax purposes, allowing emigrants to access their retirement annuities if they have maintained their tax non-resident status for a period of not less than three consecutive years. Let’s break it down step by step.

Tax emigration vs financial emigration: what’s the difference? Find out here.

South Africa’s retirement annuity withdrawal rules, explained

According to the rules that govern South African retirement funds, there are only a handful of exceptions in terms of which members can access their retirement savings before the age of 55. Other than these limited exceptions, members are generally not permitted to touch their savings before the official legislative retirement age.

One of the exceptions that allowed South Africans to encash their retirement annuities early was the process of formal emigration through the South African Reserve Bank. In 2021, a simpler tax emigration process overseen by the South African Revenue Service has replaced the process of formal emigration. This means that South African expats can still cash in their retirement annuities before the age of 55 – the only thing that has changed is the manner in which this is achieved and the timeframe to completion. Instead of lodging an application with the Reserve Bank to have your status changed from resident to non-resident for exchange control purposes, you will apply to SARS to have your status changed from resident to non-resident for tax purposes.

Can you still cash in your retirement annuity early?

The new rules now make provision for a retirement fund member to access their retirement  annuity earlier than 55 by ceasing their tax residency and maintaining their non-resident position for a minimum of three years. Despite contrary belief, these changes actually make it easier for those who left the country some time ago without completing formal emigration to access their retirement savings with relative ease. This is because the new rules around tax emigration apply retroactively, in that if an individual emigrated a year ago, they’d only have another two to wait before they became eligible to withdraw their retirement funds early.

On the other hand, those who have relocated recently or who are still in the process of relocating can expect the full wait before they can get their hands on their retirement annuity savings. This means that if you thought you were going to tap into your RA to fund your new life abroad,  you’re going to have to make other money plans.

What are the tax implications of early RA withdrawal?

If waiting until retirement to access your savings isn’t something you feel that you can do, it’s worth noting that if you want to access your retirement funds before you retire (such as on emigration) a punitive tax table will be applied to the move. This is supposed to give you second thoughts about cashing out early as the maximum tax bracket for pre-retirement withdrawals is 36%. This has the potential to kick a major dent in the amount that you will clear. If, for example, you wanted to cash in your nest egg of R3 million, the income tax charge could be more than R900 000.

Be realistic about your reasons for cashing in your RA early

With the above in mind, expats (both current and future) must carefully evaluate their specific situation and determine a course of action objectively: would it be smarter to wait to access your savings when you retire, or should you take the tax penalty hit and access the money now? Bluntly speaking, when people relocate from South Africa, they’re hesitant to leave their wealth behind. Weighed against concerns about economic stability and currency volatility, many feel justified in taking the penalty hit and paying the tax in order to move their money with them.

When can you cash in your retirement annuity after tax emigration?

To clarify: South Africans must now complete the process of tax emigration to access the funds in their retirement savings, whether retirement annuity, pension preservation fund, provident preservation fund. Once you have had your tax status changed from resident to non-resident, you will need to maintain this position for at least three years before you will be allowed to cash out your South African retirement annuities.

Practically speaking, you can only complete the process of tax emigration after you’ve left South Africa, and once this process is complete you will need to hold this tax position for  three years before you can use your  early withdrawal benefit. However, once this time has passed, you can cash in your full savings which you can then have transferred abroad after SARS has taken their due and you’ve settled any early withdrawal penalties or fees that your RA provider may require.

FinGlobal: retirement annuity encashment specialists

Need some guidance in making a decision about whether or not to cash in your South African retirement annuity once you’ve relocated abroad? FinGlobal can help. A team of certified financial planners, , chartered accountants, tax specialists and bankers is ready to help you with objective expertise in all areas of cross-border finance.

Ready to learn more about cashing in your retirement annuity before the age of 55? Let’s talk about your options. Leave us your contact details and we’ll be in touch.