For many South Africans, the dream of relocating to a new country becomes a real possibility around retirement age. With changing life circumstances, a move abroad can be an exciting way to spend your golden years. But before you pack your bags and head to the airport, it’s vital to understand how your South African pension or retirement annuity will be affected, especially if you are already receiving a regular pension income from a living or life annuity.
What is a retirement fund, and how does it work?
There are several different ways to save for retirement, including provident funds, pension funds, and retirement annuities.
A pension fund is a retirement savings plan many South African employers offer. These pension funds are regulated by law and aim to provide financial security after retirement. Employers and employees typically contribute to the fund throughout your employment, often with tax benefits.
Upon retirement age (as defined by your employment contract), you gain limited access to your pension. According to the pension fund withdrawal rules, you can withdraw a portion (usually up to one-third) as a lump sum, with taxes applied. The remaining amount is used to purchase an annuity, which provides you with a regular income for the rest of your life. This income is subject to taxation.
A retirement annuity fund is similar to a pension fund, except it is not linked to your employment. The same rules apply to pension funds regarding retirement annuity fund withdrawals. As long as you remain in South Africa and are a tax resident, you can only withdraw one-third of your fund as a lump sum while being obliged to invest the remaining two-thirds in purchasing an annuity product to pay out a regular pension income.
Suppose you emigrate from South Africa and cease your tax residency with the South African Revenue Service. In that case, you can withdraw your retirement annuity in full (less tax and early surrender penalties) after three years.
Read more:
- South African Retirement Annuities: what you can do with them before and after emigration?
- Retirement annuity policy surrender in South Africa: 3 important things for expats to understand
What you need to know about planning for retirement abroad
If you’re considering an international move, there are some important financial considerations specific to your pension income in South Africa:
- Existing pension income: If you’re already receiving pension payments from South African funds, you’ve likely allocated a portion of your capital to a living or life annuity that provides a regular income stream.
- Beneficiary income or leaving funds behind: Perhaps you’re a beneficiary of someone else’s pension or plan to leave some of your retirement funds in South Africa to support future visits.
If you emigrate from South Africa, will you need to leave your pension income behind?
Not necessarily. Your pension income will still be accessible from outside of South Africa. There will just be a few more hoops for you to jump through before you can get your hands on it.
Read more:
- Tax implications of emigration on your South African retirement funds.
- I currently receive a regular income stream from my pension fund in SA. Can I transfer the capital abroad?
Tax implications of accessing your pension income funds abroad
- Your pension income is taxed in South Africa (due to its local source). It might also be subject to taxation in your new home country. However, a tax relief measure is provided here.
- Your pension income must be paid out into a South African non-resident bank account, after which it can be transferred offshore for your use.
- If you remain a South African tax resident, you can transfer up to R1 million per annum offshore without prior tax clearance using your Single Discretionary Allowance.
- Suppose you no longer cease tax residency or transfer more than R1 million annually. In that case, you must follow the new SARS Approved International Transfer (SARS AIT) process, which effectively covers the Foreign Investment/Capital Allowance.
Read more:
Making the most of your pension income abroad
As mentioned, your emigration does not mean giving up access to your pension. Here are some tips:
- Maintain a South African bank account: You’ll need this to receive your pension, which can then be transferred internationally. (FinGlobal will be glad to assist with this!)
- Review retirement annuity and pension fund rules: Understand your options for adjusting payment frequencies, which can lessen your forex transaction fees and save you some money.
- Annual advance payment: If the fund rules allow, consider opting for an annual lump sum payment. This simplifies your tax obligations and allows for a single yearly transfer.
By carefully planning and understanding the limitations around your retirement annuity and pension fund rules, you can ensure a smooth transition to your new life abroad while still receiving your South African pension income.
FinGlobal: cross-border financial specialists for South Africans overseas
Moving abroad? FinGlobal can be your trusted partner through your financial transition. We handle all aspects of expat tax compliance in South Africa, including tax clearance, international money transfers to receive your South African retirement income and tax refunds to rectify double taxation on your pension income.
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