New rules for cashing out South African retirement savings: understanding the tax implications

Numerous updates to the rules around retirement plans in South Africa have been implemented by the National Treasury and the South African Revenue Service (SARS) over the past few years. Such changes have led to unfavorable tax consequences and penalties for the early withdrawal from retirement annuities in South Africa, and the imposition of increasingly strict rules and regulations. While it’s tempting to think that these updates to the rules are unfair to the consumer, it’s important to remember that the primary goal is to motivate South Africans to be more proactive in saving adequately for retirement.

So what do you need to know about how the rules have changed and what tax implications these updates will have for you?

The changes made to retirement annuity withdrawal rules have been progressive. To understand exactly where we’re at now on the new path set out for retirement saving products, it is necessary to review the major changes made to get to this point.

1. First, inconsistencies in tax treatment were harmonised across the three categories of retirement funds (pension, provident, and retirement annuity funds) by eliminating different caps and deduction bases.
2. To bring them into alignment, a legislative amendment allowed for a 27.5% tax deduction up to a maximum of R350 000 per annum, applied to all retirement fund contributions.

• ​​Next came an update that required retirees to purchase an annuity with a portion of their pension or provident fund. This was intended to protect retirement funds, and promote uniformity among schemes. However, there were still limitations on the annuities that could be bought upon retirement.
• Then the three-year lock-in period was introduced. For emigrating taxpayers, a waiting period was introduced, which meant they could only withdraw their retirement funds in full after they’d ceased tax residency with SARS and maintained this position for at least three years. Previously emigrants could make an early retirement annuity withdrawal immediately after completing the process of financial emigration.
• After which the paperwork requirements were updated. In order to gain access to withdraw retirement annuity savings after the three years had lapsed, it became necessary to provide a Tax Clearance Status (TCS) PIN issued by SARS before a full withdrawal could be made. However, this PIN expired 12 months after being issued, which causes practical problems. This has since been updated, and now a Notice of Non-Resident Tax Status Letter is now required from SARS, which does not expire.
• Next came the Taxation Laws Amendment Act (TLAA) in March 2022, which gave retiring members more choice in terms of the types of annuities available to purchase on retirement.
• This was followed by an attempt to implement a tax levy on individuals ceasing tax residency when accessing retirement benefits to withdraw, but this was strongly opposed and scrapped.

With all these changes, South Africans found themselves in a position where they were unable to access their retirement saving funds without adverse tax and penalty implications. Some even compromised their retirement and employment security in order to gain urgent access to their funds. Expats subject to the three-year waiting period found themselves unable to withdraw their retirement annuity savings to provide a softer landing on the other side of international relocation, while still being subject to taxation in South Africa even after emigration.

In an attempt to balance immediate financial hardship with the pressing need to provide adequately for future retirement, a number of amendments to retirement benefit rules were proposed.

Retirement fund rules: splitting savings into two pots

In December 2021, the South African government suggested introducing a new retirement system with the aim of simultaneously addressing the need to provide for retirement and assist households with financial difficulties by enabling retirement withdrawal benefits to be used as assets.

This system was to take effect in March of 2023 (it has since been pushed out to March 2024), and is to involve the separation of retirement funds out into two pots: a retirement pot and a savings pot, both of which can receive contributions. Previous contributions and growth were to be evaluated as of 28 February 2023 to make up the vested pot, which will be transferred to the new system. To implement this change, new definitions will be inserted into section 1(1) of the Income Tax Act, and legislative amendments will allow for withdrawals of at least R2 000 from the savings pot once every year.

The proposed system also includes new tax treatment rules, which are almost uniform, but not quite. Withdrawals from the vested pot will be taxed according to the previous system’s tax provisions, while all annual withdrawals from the savings pot will be added to the individual’s gross income and subject to taxation at their marginal income tax rate.

The money in the retirement pot will be untouchable until retirement, and taxed according to the usual lump sum tables that apply to retirement annuity fund withdrawals.

Retirement Annuity withdrawal rules South Africa: what now?

In theory, the changes suggested by our National Treasury are admirable. In practice, the two-pot system will significantly complicate the tax implications of retirement annuity and other policy withdrawals. This poses a particular challenge for expats who have ceased South African tax residency either before or after the system’s enactment, as well as for those who plan to do so in the future. It will be necessary for such individuals to obtain both the Notice of Non-Resident Tax Status Letter and the Tax Compliance Status (TCS) PIN before they can access their funds and move them abroad. These requirements remain crucial, and the intricate nature of the tax treatment of retirement interests highlights the need for consultation with experts to ensure a compliant, efficient, and smooth approach is taken in each case.

FinGlobal: retirement annuity encashment specialists

Ceasing tax residency, expat tax compliance and early retirement annuity withdrawals are complicated matters to juggle from outside of South Africa. Get on-the-ground, expert assistance from FinGlobal – cross-border financial specialists for South African expats. We can assist you every step of the way, ensuring a seamless financial transition.

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