Retirement annuities have been designed as tax efficient vehicles that encourage South Africans to save during their working years, to ensure that they have sufficient income to maintain a comfortable lifestyle once they’ve clocked out of the rat race. But what happens to your retirement annuity if your plans change, and you no longer intend on retiring in South Africa? Can you withdraw your retirement annuity after the age of 55 if you plan to emigrate so as to retire abroad?
Let’s unpack some common questions that often arise around retirement annuity withdrawal and emigration after the age of 55.
Can you withdraw your retirement annuity if you emigrate?
If you are already over the age of 55, you might be tempted to retire officially from your fund so you can access your retirement annuity before you emigrate. While this might be beneficial short term, you have to think of the bigger picture before you make your decision. If you reach the official age that allows you to withdraw your retirement annuity under ordinary circumstances, this withdrawal will only allow you to take one-third of your savings as a lump sum cash payment immediately, less tax. The law requires you to use the remaining two-thirds to purchase a living or life annuity which will pay out a pension income in South Africa during your retirement. Which isn’t exactly helpful if you’re planning on retiring abroad.
However, if you emigrate from South Africa and become a non-resident for tax purposes (through the process of emigration) this will allow you to cash in the full value of your retirement annuity, once you have maintained non-resident status for a minimum of three years. Cashing in your retirement annuity after you have completed tax emigration allows you to access the full value of your savings (less tax and fund administrative fees) and transfer the proceeds abroad, to use as you please.
What is the 3 year emigration rule?
In theory, with effect from 1 March 2021 your retirement annuity withdrawal benefits are locked in for a minimum period of three years once you have ceased tax residency, after which the full sum can be cashed in, once SARS has taken their cut as lump sum tax. In practice, this means that you can withdraw the full value of your retirement annuity approximately three years after you have left South Africa provided that you have completed the Cessation of Tax Residency service and received confirmation from the South African Revenue Service that you are now a tax non-resident, as the physical presence test holds that you no longer meet the time-based requirements of tax residency once you have been outside of South Africa for a minimum of 330 days. As a result, you are deemed to have ceased your tax residency counting back to the day that you permanently left the country.
- Three misconceptions about the three-year rule on Retirement Annuity withdrawals for South African expats
- New rules for cashing out South African retirement savings: understanding the tax implications
How to become a non tax resident of South Africa
The first step to cashing in the full value of your retirement annuity is relocating overseas. In this case, you’ll be retiring abroad. The second step is breaking tax residency with South Africa. This refers to the official process of notifying SARS that you no longer meet the requirements of either the ordinarily resident or physically present tests, and that your status should be changed to non-resident for tax purposes. After three years of being a non-resident, you can then initiate the process to withdraw the full sum of your retirement annuity,
Can you take your pension out of South Africa?
If you are already drawing a pension income, you will not be able to relocate the capital underlying your pension funds. You will need to continue having your pension income paid out in South Africa and will have to remit the funds abroad in order to access your money. Provided that the Fund Rules allow for it you can withdraw your Pension Fun, Provident Fund, Pension Preservation Fund, or Provident Preservation Fund in full after the application of withdrawal tax.
It is important to note that Pension Income as well as Annuity Income from a South African source will always be taxable in South Africa first. Contact us to better understand the impact as well as available solutions should you have already retired from a fund and are receiving an annuity income.
FinGlobal: South African retirement annuity encashment specialists
Making the right decision about what to do with your retirement annuity when emigrating is important for your financial future. FinGlobal can assist you to ensure that you get the best possible outcome, no matter your circumstances. We’re ready to help with every step of your financial relocation to make it as stress-free as possible.
To see how we can assist you with a seamless financial transition when retiring abroad, leave your contact details below and we’ll be in touch regarding your financial and tax emigration requirements!