When work and familial responsibilities no longer anchor you to a specific location, retiring abroad becomes an exciting prospect. With children having left the nest, a well-established financial portfolio, and reduced family obligations, many individuals and couples choose to move to a foreign country for their retirement, as it aligns with their new circumstances. Whether you have already retired or are nearing retirement age, it’s important to understand the nuances of your retirement income before departing South Africa.

What is a pension fund and how does it work?

While the term may seem self-explanatory, it’s beneficial to clarify. A pension fund is a retirement-focused saving mechanism provided by South African employers to their employees as part of their employment terms.

• These pension funds are subject to regulation by both the Income Tax Act and the Pensions Fund Act, and their primary objective is to ensure your financial security once you retire.
• During employment, it’s customary for both the employer and the employee (the fund member) to contribute to the pension fund, as this comes with significant tax deductions.

Once you reach designated retirement age, typically specified in your employment contract, you are granted limited access to your pension fund. At this point, you have the option to withdraw up to one-third of the fund as a lump sum, with taxation applied according to the lump sum tax table. The remaining funds must be used as capital to purchase an annuity that will pay out a monthly pension, which is also subject to taxation.

Retirement income: the lowdown on pension funds in South Africa

If you’re contemplating an international relocation at this point in your life, some additional financial considerations arise before you emigrate, particularly in the following scenarios:

1. If you are already receiving pension income from South African retirement funds, having retired from one or more of these funds and allocated at least two-thirds of the annuity funds for a living or life annuity, which provides a regular pension income during your retirement.
2. If you are a beneficiary of inherited pension income streams or are considering leaving a portion of your retirement funds in South Africa to serve as income for return visits to your family.

Read more: Retirement Annuity vs Pension Fund: What’s the Big Difference?

Can I transfer my pension out of South Africa?

In a nutshell, the transfer of your pension out of South Africa is not permissible. There is no flexibility or portability when it comes to South African pension income and the capital used to support these pensions remains inaccessible, even after ceasing to be a tax resident. It must remain in South Africa until the pension capital is either used up, or the obligation to pay the pension terminates on the pension holder’s passing.

Furthermore, such pension income is payable exclusively in South Africa, but once it has been deposited into a local non-resident account, you can then transfer the funds offshore. Bear in mind that pension income is subject to taxation in South Africa due to its local source, and it might also be subject to taxation in your destination country.

Read more: Living abroad? Get relief from South African tax on pension and annuity income!

What happens to my pension when I emigrate?

If you are already receiving pension or retirement annuity income, you must receive it into a South African bank account, through which you can access your funds by means of an international transfer.

You’ll need to review your fund rules before you make the move in order to understand your options regarding adjustments to payment frequencies and related choices. Often, flexibility may be limited, but once you’re clear on your options, you can decide what the best route is.

• Regarding the capital, it’s important to note that the fund administrators and trustees handle the management of the investment assets that generate income for pensioners, and as an individual, you don’t have control over their management.
• When it comes to income, you can adjust your payment frequency within the fund rules. If the rules permit, opting for an annual advance payment for your pension income can make a huge difference. This way, you’ll receive your retirement income from South Africa once a year through a single offshore transfer, which will also simplify your tax obligations.

FinGlobal: cross-border financial services for South African expats

Looking for a trusted partner to help with your financial transition? FinGlobal can assist. We’re ready to help you with all aspects of your expat tax compliance, from tax clearance to international money transfers from South Africa to receive your pension income, and tax refunds.

To find out how our convenient services can streamline your cross-border financial affairs, leave your contact details below and we’ll be in touch to start the conversation.