Liquidating retirement annuities after emigrating

Retirement annuities (RAs) were created as tax-efficient investments for individuals who want to save for retirement. As opportunities for relocation abroad have grown, however, many expats now find themselves in a position where South Africa is no longer the intended abode for their golden years and retaining a South African RA in this scenario makes little sense. Rules and regulations, however, dictate that this investment is meant for retirement after-all, so they won’t allow you to cash it in early under normal circumstances. In this context, let’s take a look at how expats can go about cashing in their RA.

Cashing in my retirement annuity

Why the stringent rules on cashing in my retirement annuity?

RA’s in South Africa are governed by the Pension Funds Act, which aims to ensure that the funds are managed according to certain mandates to ensure appropriate risk levels are maintained and also to ensure that strict rules apply in regards to the accessibility of the invested funds. The reasoning here is that these funds should be earmarked for an individual’s retirement pot to ensure adequate provisions are available.

So what are these rules exactly?

• An RA can only be encashed once an individual reaches the legal retirement age of 55.
• Upon retirement, the options are as follows:
  • If the value of the fund is less than R247,500 the full amount can be cashed out.
  • If the value of the fund exceeds R247,500, only one-third of total value can be cashed out and the remainder will be invested in a pension fund (also called a Living or a Life Annuity) to provide a regular income for retirement.

• There are however some exceptions that allow for retirement annuity withdrawal before the age of 55:
  • The total value of the RA is less than R15,000,
  • The policyholder has suffered a permanent disability,
  • And this is where it gets interesting for expats – if an individual has completed a tax emigration (ceased to be tax resident) and has maintained this status for three consecutive years.

What if I’m older than 55 already?

Once an individual reaches the retirement age of 55, there is no legal obligation to retire from the fund. In fact, most emigrants do not wish to retain a pension income in South Africa and therefore, if their funds are in excess of the R247,500 threshold and they don’t wish to have a South African pension income, the withdrawal option is available if all requirements for tax emigration are met.

What is tax emigration and how does it influence my retirement annuity funds?

The Tax Emigration process was cemented in 2021 with the enactment of the Taxation Laws Amendment Bill. In simple terms, tax emigration is the process of proving to the South African Revenue Service (SARS) that you are no longer a resident for tax purposes and therefore not liable for any South African income tax on foreign earnings.

Alongside the implementation of the new and improved Tax Emigration process, the Financial Emigration process was phased out. Financial Emigration with the South African Reserve Bank was the process whereby an emigrant applied to change their exchange control residency status.

Tax Emigration from South Africa is of utmost importance to an emigrant who wants to encash their RA early and transfer the proceeds to their new country of residence. The snag with a tax emigration is that your retirement annuity funds are not immediately accessible once you have ceased to be a tax resident of South Africa. To ensure that an emigrant has relocated on a permanent basis, a three-year waiting period (from the effective date of tax residency cessation) was implemented.

This is in stark contrast to the outdated Financial Emigration process, whereby you could instruct an immediate withdrawal, no matter the time spent living outside of South Africa. It is important to note that from 1 March 2022, RAs can only be accessed early if you meet the administrative requirements of a tax emigration, regardless of whether you are a financial emigrant or not.

What is the process?

It all starts with tax residency. You must cease tax residency in South Africa and successfully complete a tax emigration to become eligible to cash in yourRA. It entails the following:

• You must not meet the requirements of South African tax residency tests – this is determined by either the Physical Presence, Ordinary Residence or Double Tax Treaty tests.
• Submit a cessation of tax residency to SARS – the submission is usually done via a tax return in the year that you cease to be resident, but it can currently be backdated with a manual submission.
• Submit a deemed capital gains tax calculation – when you cease to be tax resident, it triggers a deemed Capital Gains Tax or an “Exit Tax” on worldwide assets held the day before your residency is ceased.
• Navigate a stringent audit process – a manual intervention on your submission is triggered by SARS auditors who will assess your information in order to approve a non-residency status.
• Apply for an Emigration Tax Clearance Status (TCS) – your tax compliance status as well as the source of funds you wish to transfer will be verified before the bank is allowed to transfer your funds abroad.
• Maintain a non-tax resident status for three consecutive years – if your tax residency cessation was backdated more than three years you can immediately continue with the RA encashment process. If not, you have no choice but to wait it out.
• Submit RA withdrawal documentation – once a tax cessation is approved, you must submit all the relevant documentation to the insurance company holding the policy. They require specific documentation to process the request.
• Wait for a tax directive from SARS – RAs are taxed when you cash them in and the insurance company requires a directive from SARS to deduct the appropriate amount of tax before they can pay the net proceeds to you.
• Remit the funds – Once finalised, the proceeds can be transferred offshore to a destination of your choosing. You will require a valid TCS (currently 12 months) to process the request.

FinGlobal – Retirement annuity encashment and tax emigration specialists

A tax emigration process coupled with retirement annuity encashment and then ultimately remitting the funds can be an administrative nightmare, especially when attempting to do so from a different country. FinGlobal is ready to step in to take the burden of this cumbersome process off your shoulders. From tax emigration to retirement annuity encashment and international funds transfer, FinGlobal can assist with sound advice and timeous and efficient turnaround times, all done in a tax compliant manner.