As working humans, we’re all ultimately headed for the same destination: retirement. The only difference? The vehicle we choose to get there. And when it comes to retirement savings vehicles, there is a fair amount of choice – there are pension funds, provident funds, pension provident funds and retirement annuity funds. But if they’re all taking us to the same place, aren’t they all the same? Believe it or not, they’re actually not all the same. Let’s take a look at the differences between the retirement saving options, and then unpack what happens to those nest eggs when you choose to emigrate.

What is a pension fund in South Africa?

A pension fund is usually only accessible through the company at which you are employed, in other words, it is an employment benefit. The pension fund’s money is managed by appointed trustees, who decide which assets the fund invests in. contributions to the pension fund are made by you, and your employer, and these contributions are tax-deductible up to a certain point. Growth within the pension fund while you’re a member of the fund is tax free. Tax is only payable when you access your funds, usually at retirement.

Read more:

• Pension funds, provident funds & retirement annuities explained.
• Early access to your South African pension fund – yes or no?

What happens to your pension fund when you retire?

• You are allowed to withdraw a maximum of one third of your pension fund savings as a cash lump sum, which is taxable.
• The remaining funds must be used to purchase an annuity income product, and income derived in this manner is taxable.
• If the total sum is less than R247 500, you can withdraw the full amount as a cash lump sum, subject to tax.

What happens to your pension if you leave the company before you retire?

If you resign and move to a new company, for example, you might need to move your money out of the old company’s pension fund. At this point you can move your savings to either:

• the pension fund at your new company
• a preservation fund
• or a retirement annuity fund

When you change jobs like this, you can also take up to a third of your savings as a cash payment, subject to lump sum tax.

What is a preservation fund in South Africa?

It is a specialised retirement fund created for the purpose of receiving lump sum benefits from a pension or provident fund when you leave your job before reaching retirement age. As long as your money remains in the preservation fund, it keeps on growing. You have the option to make one partial or full withdrawal from your preservation fund before turning 55, but after that age, you can only access the remaining balance.

What is a provident fund in South Africa?

A provident fund is essentially the same as a pension fund. Before changes to legislation in March 2021, a provident fund used to differ in that you could take the entire sum as cash upon resignation or retirement, which you’d be taxed on, without being compelled to purchase an annuity. After the retirement reforms, provident funds are now almost exactly the same as pension funds in that:

• Fund members can take a third of the benefit as a lump sum
• The remaining two thirds must be used to buy an annuity that provides a monthly income for retirement.

What happens to your provident fund if you leave the company before you retire?

Much like a pension fund, if you leave a company before you retire, you may have to move your retirement savings out of the company provident fund. At this point you can move your money to your new company’s fund, a preservation fund, or to a retirement annuity fund. You also have the option to take a lump sum withdrawal as cash, but you will need to pay tax on this.

A lump sum withdrawal is available to you, but any lump sum pay-outs will, of course, attract the associated lump sum tax. Growth within the provident fund while you are a member of the fund is tax free. Tax is only payable when accessing your funds.

What is a retirement annuity fund in South Africa?

A retirement annuity (RA) is a savings vehicle not linked to your employment. You, as an individual, make regular monthly contributions to your fund and you have the flexibility to select the investment funds within the bounds of retirement fund regulations. RAs are usually suited to entrepreneurs, freelancers and contract workers.

What happens to your retirement annuity when you retire?

Here’s how a retirement annuity operates: When you decide to retire, either at the age of 55 or later, you have the option to:

• Withdraw a maximum of one third of your RA as a cash lump sum (bearing in mind tax), after which you will use the remainder to purchase an income annuity. The income paid out from this annuity is also taxable.
• Use the entire amount to purchase an annuity which will pay out a regular pension income for your retirement.
• Withdraw the entire amount where the total value in your fund is less than R247 500, subject to lump sum taxation.

It’s important to note that changing jobs won’t affect your retirement annuity since it operates independently of employment.

What happens to my retirement savings when I emigrate?

Previously, under the financial/formal emigration dispensation, emigrants could access and withdraw the full value of their retirement savings immediately upon having their exchange control status changed from resident to non-resident, subject to tax.

Today, the rules are a little different. Formal emigration through the South African Reserve Bank (SARB) has been replaced by tax emigration through the South African Revenue Service. Once you have become a non-resident for tax purposes by ceasing your tax residency with SARS, your funds are then locked in for three years before they become accessible. Yes, it is a bit of a wait, but you can still withdraw the full value of your savings, less tax, once the wait is over.

Which retirement saving vehicles does the three-year rule apply to?

Although the three-year rule mentions retirement funds, its impact is confined to preservation funds and retirement annuities (RAs). Let’s reiterate this point: The three-year rule applies only to retirement annuity and preservation funds; it does not extend to pension funds. As far as preservation funds and provident preservation funds go, it must be pointed out that even if you’ve already exercised your pre-retirement once-off withdrawal option, you still have the ability to make a full withdrawal (subject to fund penalties and lump sum tax to SARS) once you have maintained non-resident status for three years.

Read more:

• 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.
• Emigration from South Africa after 55: the facts on retirement annuity withdrawal.

FinGlobal: retirement annuity encashment specialists

If you’re ready to get the clock started on cashing in your retirement savings, FinGlobal can assist. From start to finish, FinGlobal can help you every step of the way with your retirement annuity withdrawal, facilitating the safe and timeous transfer of your funds out of South Africa. From tax clearance, to tax emigration, foreign exchange and more, FinGlobal has already assisted thousands of clients in over 105 countries, and we’re ready to do the same for you.

Leave your contact details below or send an email to info@finglobal.com and we’ll be in touch to discuss your specific cross-border financial requirements.