It’s a question that’s top of mind for most South Africans who have relocated abroad permanently: Once I’ve ceased tax residency in SA, how long before I can cash in my retirement annuity? Whether that relocation was recent or took place some time ago, it’s a question that many have been pondering since tax law changes in 2020 saw the phasing out of formal emigration, which had previously been used by expats to trigger the early withdrawal benefit on their retirement annuities back in South Africa.
Now that formal emigration through the South African Reserve Bank is no longer an option for expats, what’s the procedure for cashing in a South African retirement annuity early? Let’s take a look at what’s changed, and what you need to know.
Cashing in your SA retirement annuity
When can you cash in your South African retirement annuity?
Generally speaking, you’re not supposed to touch your retirement savings until the official retirement age of 55. This is to protect you from spending your savings before retirement, which helps to ensure that you have sufficient funds to finance your golden years.
Every rule comes with exceptions, and there are a handful of conditions under which you are allowed to cash in your retirement annuity early. As mentioned, it used to be possible to withdraw your retirement annuity funds once the South African Reserve Bank had approved and formalised your emigration. But formal emigration is no longer a thing, so now what?
Formal emigration has been replaced by tax emigration
Expats (both current and future) looking to wrap up their financial affairs in South Africa must now complete the process of tax emigration through the South African Revenue Service. Where previously formal emigration changed an individual’s status from resident to non-resident for exchange control purposes, tax emigration now involves a change from resident to non-resident for tax purposes.
Who is a South African tax resident?
According to the Income Tax Act, a tax resident is someone who meets the requirements of the ordinarily resident test or the physical presence test. This means that South Africa is either your real home, or you spend enough time in South Africa that the South African Revenue Service feels justified in taking their cut of your income.
What does being a South African tax resident have to do with cashing in your retirement annuity early?
Long story short – if you stop being a South African tax resident, you become eligible to trigger the early withdrawal benefit on your retirement annuity. Once you have withdrawn your retirement annuity funds and you have paid SARS their due in the form of lump-sum withdrawal tax, you are then free to transfer your funds abroad.
What’s the catch?
Everything in life has a catch. You can only encash your South African retirement annuity early once you have tax emigrated from South Africa and maintained this non-resident status for a minimum of three years now that tax laws have changed. According to our National Treasury, this three-year waiting period was designed to ensure that your emigration sticks and you’re not simply moving abroad, cashing in your retirement annuity, and moving back to South Africa a few years later with only the prospects of a penniless retirement to look forward to.
This means that if you’re still planning to relocate overseas and you’re still well under the age of 55, you’re going to have to wait three years before you can withdraw your retirement annuity savings. After the age of 55, you would not be able to encash your retirement annuity at all, but this is not a new rule. Practically speaking, you can only cash in your retirement annuity early if you’re not yet 55, after which it’s too late because you’re now eligible to retire and so it’s no longer an early withdrawal.
This also means that if you’ve already been living abroad for a number of years without already completing formal emigration, you are still eligible to cash in your retirement annuity early, after you complete tax emigration. According to the physical presence test that SARS uses, you cease to be a tax resident if you have relocated abroad and 330 days have passed and you have no intention of returning to South Africa.
Once this time has passed, you are then considered to have ceased your tax residency on the day that you left South Africa permanently. As a result, all you need to do is add three years onto the date of your permanent relocation, in order to calculate when you’ll be eligible to cash in your South African retirement annuity.
What happens when you cease tax residency in South Africa?
Other than becoming eligible to cash in your retirement annuity once there are three years between you and South Africa, changing from resident to non-resident for tax purposes has the following implications:
- You are no longer eligible to pay tax on your foreign employment income in SA.
- You become eligible to pay an exit tax on your tax emigration.
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