So, you’re thinking about moving abroad and retiring there? That’s awesome! But before you decide, let’s talk about something important: your retirement savings. You’ve worked hard for that money, right? The question is, what happens to it when you leave South Africa? It can be confusing to learn about all the different types of retirement funds and recent changes to the law in terms of the two-pot retirement system in South Africa. Let’s figure this out together.
A new era of retirement savings – what is the two-pot system in South Africa?
The two-pot system for retirement funds, set to take effect on September 1, 2024, introduces a significant change in the rules regarding South African retirement savings. This innovative approach divides your retirement contributions into two distinct pots: savings and retirement.
The savings pot – your financial safety net: The savings pot, holding one-third of your contributions, acts as a flexible emergency fund. You can withdraw from this pot once a year, subject to income tax, providing a safety net for unexpected expenses. The minimum withdrawal is R2,000, with no maximum limit.
The retirement pot—securing your future: The retirement pot, holding two-thirds of your contributions, is designed for long-term savings. It cannot be accessed until retirement when the full amount must be used to purchase an annuity that will provide a regular income.
The vested pot – preserving past contributions: Contributions made before September 1, 2024, will be placed in the vested pot, which operates under the original rules. To facilitate the transition, 10% of your vested pot (up to R30,000) will be transferred to the savings pot.
In essence, the two-pot retirement savings system is intended to offer greater flexibility in a financial pinch while ensuring sufficient funds for a comfortable retirement.
Explaining retirement two-pot access – what happens when you retire?
When you retire, your retirement savings will be divided into different pots, each with its own rules.
Pension fund members: One-third of your vested pot can be taken as a cash lump sum, subject to retirement lump sum tax. The remaining two-thirds must be used to purchase a pension product.
Provident fund members: The vested portion (contributions and growth before March 1, 2021) can be withdrawn in cash. Two-thirds of the non-vested portion (contributions and growth after March 1, 2021) must be used to purchase a pension product.
Savings pot: The entire savings pot can be withdrawn in cash upon retirement, subject to retirement lump sum tax. You can transfer the savings pot to your retirement pot to purchase a pension product or buy a pension directly from the savings pot.
Retirement pot: The entire retirement pot must be used to purchase a pension product. If the combined value of all your compulsory annuitisation benefits is less than R165,000, you can withdraw the amount in cash, subject to retirement lump sum tax.
Get your ducks in a row before withdrawing from your savings pot
Ensure your tax status is compliant by ensuring your returns are up-to-date and any outstanding taxes are paid. Verify that your retirement fund is part of the two-pot system. You may need to opt in if you’re an older provident fund member. Make sure you have at least R2,000 in your savings pot, and then carefully consider the impact of this move. Weigh up if a withdrawal is essential and how it might affect your future retirement savings.
Is there another way to withdraw your retirement annuity before age 55?
While everyone is focused on withdrawing from the two-pot system, the alternative is overlooked. Once you permanently relocate from South Africa and complete tax emigration to have your tax status changed to non-resident, you become eligible to cash in the total value of your retirement annuity savings before age 55. All you need to do is prove you have been a non-resident for three consecutive years, pay SARS their cut and any administrative penalties for early withdrawal, and the total value of your retirement annuity can be withdrawn—no need to purchase an annuity in South Africa, just a clean break with your money.
Once you’ve got the proceeds from your retirement annuity withdrawal, you can transfer it abroad. This is possibly a smart move to make in your retirement savings, as this is the most effective way to take your money offshore and protect your savings from the volatility of the Rand.
Read more: South African Retirement Annuities: what you can do with them before and after emigration?
How to withdraw your retirement annuity before the age of 55
First, you must prove you’re no longer a South African tax resident. This means getting a Confirmation of Non-Resident Tax Status Letter from SARS. Think of it as a passport for your money. You’ll need this for your fund administrator to apply to SARS for a tax directive, an order from the revenue authority clarifying how much tax must be deducted before your money can be paid. You’ll also need an Approval International Transfer (AIT) TCS PIN. This is like a permit to move your money out of the country.
Withdrawing your retirement funds is more complex than just taking the money. Tax implications depend on your personal situation and the existence of a tax treaty between South Africa and your new home. Bottom line? It’s best to consult a tax expert to get a clear picture of your situation and how it will affect your taxes.
Interested in reading more about retirement planning for expats? We’ve curated some helpful articles for you:
- Expert insights: When is the right time to surrender your retirement annuity?
- What’s the difference between a provident fund, pension fund and retirement annuity?
- The facts on emigration and withdrawing from your retirement annuity before and after 55.
- Tax implications of emigration on your South African retirement funds.
FinGlobal: retirement annuity encashment specialists
Choosing a cross-border financial services provider to handle your financial transition before, during and after your emigration from South Africa is a big deal.
Why choose FinGlobal? Speed, cost, compliance, expertise, confidentiality, convenience and value. That’s what we offer. We’ll handle your financial migration efficiently, securely, and cost-effectively. Our team of experts will guide you through withdrawing your retirement annuity early, ensuring you get the most out of your money.
Ready to get started? Leave your details below, and we’ll call you or email info@finglobal.co.za with your retirement annuity withdrawal questions.