Retirement annuities (RAs) are tax-efficient investments that allow South Africans to save for their golden years – contributions are tax-deductible if the income is earned in South Africa. Essentially a commitment that you will save for the duration of your working years, RAs made sense when South Africans were planning to retire in South Africa. So much has changed and more South Africans are looking to other parts of the globe, both for career and retirement opportunities. An RA in South Africa no longer makes sense, in such a context. So what can South Africans do if plans have changed? Is it possible to withdraw RAs early? What’s the deal with cashing in your retirement annuity in 2022? Let’s take a look at these, and other frequently asked questions about RAs in South Africa.
South African retirement annuity
The FAQ on RA’s
- RAs in South Africa are regulated by the Income Tax Act (58 of 1962), they are classified as compulsory investments.
- Although your RA is not linked to employment, your employer can make contributions, which are tax deductible.
- RAs are ideal for individuals who are not in the permanent job market, preferring instead to be self-employed, or a freelancer or contractor.
- Contributions to a RA are tax deductible if income is earned in South Africa.
- A RA can only be cashed in on retirement. It’s all there in the name, really.
FAQ 1: Can I choose when to cash in my retirement annuity?
South African residents can only access their RAs from age 55 under normal circumstances.
Before tax law changes in 2021, it was not possible to touch your RA unless:
- You had celebrated your 55th birthday
- Your fund was worth less than R7 000
- You suffered permanent disability
- You completed your formal emigration via the South African Reserve Bank
In 2021 the rules around early withdrawal of RAs changed. Now you cannot access your RA unless:
- You have reached 55 years of age
- Your fund value is less than R15 000
- You become permanently disabled
- You are tax non-resident for three years
This three-year waiting period before you can cash in your RA is intended to ensure that your relocation is permanent.
Today, in 2022 there are three possible scenarios when it comes cashing in your South African RA:
- You have not left South Africa yet, your emigration is still imminent.
You must complete tax emigration when you leave, wait for three years and then prove that you are no longer a tax resident before you can encash your RA. You will only be able to cash in your RA three years from the date on which you ceased tax residency, which is usually the date you left South Africa permanently.
- You left South Africa, but you did so within the last three years.
You’ll still have to wait out the full three years from when you left. Ensure your tax documents and obligations are sorted now, to make your encashment process easier once the waiting period has passed.
- You left South Africa more than three years ago, no looking back.
Apply for tax clearance and get ready to prove that you ceased tax residency and you have maintained this non-resident position for at least three years, and then you’ll be able to access your RA before 55.
FAQ 2: What happens if I emigrate from South Africa after retiring?
Once you reach the age of 55, you are eligible for retirement and it no longer counts as an early withdrawal from your RA, but rather a timely retirement. At this point, you will need to use two-thirds of your RA to purchase an annuity (usually living or guaranteed) that will pay out a pension income for the rest of your years. The one-third that remains can be taken as cash, and any post-tax lump sum that you choose to take will form part of your foreign capital allowance. Your remaining funds must reside in South Africa and you will receive your monthly income from these funds.
FAQ 3: Are there any penalties for encashment before retirement age?
There may be significant penalties, as high as 30% when you cash in a retirement annuity policy before retirement age. There is also a significant tax on lump sum withdrawals, so you will have to weigh up your options carefully. However, it could be worthwhile taking the penalty and tax hit to move your retirement savings offshore where they’re safe from the volatility of the South African Rand.
FinGlobal: retirement annuity encashment specialists
When it comes to simplifying complicated cross-border financial situations and handling tax compliance in two jurisdictions, FinGlobal is ready to assist. We’ll take all the stress and administrative burden off your plate. From tax clearance to tax emigration and retirement annuity withdrawal, FinGlobal can help you make your money moves smartly, efficiently and in a tax compliant manner.