It’s a question we hear frequently, whether from long-time expats or would-be emigrants: What should we do with our South African retirement annuities once we live abroad? What are our options once we’ve decided that our plans for retirement in South Africa have changed? Should we continue to invest in South African retirement annuities after having relocated permanently, or should we withdraw the funds entirely and bypass post-retirement annuities entirely?
Let’s consider these questions together.
If you’re already living overseas, your retirement annuity options
If you left South Africa a number of years ago without completing formal emigration, you need to consider several things when making decisions about your retirement annuity funds as a South African tax resident not deregistered from SARS.
Annuity limitations: South African retirement annuities offer limited flexibility.
- Once your funds are invested, accessing them as a lump sum later becomes difficult.
- Income or withdrawals are subject to South African taxes.
- After you retire, you must use at least two-thirds of your retirement annuity funds to purchase an annuity product that will provide you with a retirement income (pension).
There are two main types of annuities to choose from in South Africa:
- Life Annuity: Provides a fixed income until death.
- Living Annuity: Allows income withdrawals of between 2.5% and 17.5% of the capital value.
Read more:
- Annuities in South Africa: Living Annuity vs Life Annuity.
- What happens to my living annuity if I emigrate from South Africa?
- Retirement annuity policy surrender in South Africa: 3 important things for expats to understand.
What are the tax implications of annuity income in South Africa?
Since the assets originate from South Africa, SARS will tax the proceeds based on current tax rates. Once you transfer this income abroad, it might be subject to tax in the country you now live in unless there is a double taxation agreement (DTA) in place between the two countries.
When transferring annuity income, you’ll need to consider:
- Transferring funds: If you prefer transferring your pension income out of South Africa, consider the timing and method. Your income would need to be paid out into a South African bank account, followed by offshore transfers over time. You’ll need to factor in exchange rate fluctuations, potential devaluation of the South African Rand, and any fees involved in offshore transfers.
- Tax residency status: You must verify your tax residency status with SARS, as this will affect how you are permitted to transfer funds out of South Africa. Tax residents can transfer up to R1 million annually without prior tax clearance, but more significant amounts and non-residents require approval from SARS.
If you have not formalised your emigration, your tax status with SARS must first be clarified. This means getting your South African tax affairs in order. Leaving South Africa might trigger a deemed disposal of assets, potentially resulting in capital gains tax (CGT) liabilities dated back to when you permanently left South Africa. However, by backdating your tax returns and paying any CGT due, you become eligible to cash in your retirement annuity, after which you can transfer the proceeds abroad without hassle.
Long story short? As long as you maintain your South African tax residency, you cannot touch or withdraw your retirement annuity before age 55. Once you have left South Africa permanently and become a non-resident for tax purposes using tax emigration, you become eligible for early withdrawal of your retirement annuity, subject to tax, provided you maintain your non-resident status for three unbroken years.
Retirement annuity withdrawal options and tax considerations
- Complete withdrawal: For individuals aged 55 and over, a tax-free withdrawal limit of R550,000 applies to the first withdrawal from pre-retirement funds in South Africa (once in a lifetime). Withdrawals exceeding this limit are taxed according to SARS’ retirement lump sum benefits tables.
- Under age 55: You can only withdraw an initial R27,500 tax-free. Any amount exceeding this threshold is subject to taxation.
Read more: What to know before transferring policy proceeds and cash from South Africa.
What should you do with your retirement annuity in South Africa if you have left the country?
Timing is everything. Your first step must be to ascertain your tax status with the South African Revenue Service. Consider whether there is a DTA with your current (or future) country of residence to minimise the impact of potentially being taxed twice on your pension income. You will also need to understand how the DTA applies to a complete withdrawal or choosing an annuity.
With this information, consider the pros and cons of making a complete withdrawal to avoid the limitations of annuities and currency fluctuations. However, if nearing age 55, waiting for the R550,000 tax-free withdrawal benefit might be advantageous. Ultimately, you will need to weigh the potential for growth against the risk of the Rand’s depreciation, which might impact your investment’s ability to provide a pension income for your retirement.
What should you do with your retirement annuity in South Africa? Seek professional advice first.
Every situation is unique, and there is no one-size-fits-all answer to this question. That’s why it’s best to consult the experts, who can guide you to align your financial goals with your life plans. FinGlobal can assist. We’ve already helped thousands of South Africans in over 105 countries with various aspects of their cross-border portfolios, and we’d love to do the same for you. Our team of qualified cross-border tax specialists and financial planners have the experience to advise you on the best way to make a seamless transition for your finances.
To find out how we can assist you with your retirement annuity withdrawal, pension income transfers, and more, leave your contact details below. We’ll then contact you to answer any questions you might have.