South Africa introduces new ‘two-pot’ pension system – laying out the facts for expats

Picture this: You’re living the expat life, enjoying the experience, the culture, and your new adventure. Nice, right? But when was the last time you thought about your retirement annuity savings? South Africa has introduced some significant changes to its pension system, and it’s essential to understand how they might affect you. The new “two-pot” retirement system is designed to give South Africans more flexibility when it comes to accessing their retirement savings. But for expats, there might be more involved. Let’s sit down to break down what this means and how it might impact your financial future.

Let’s set the scene: explaining retirement annuity withdrawal in SA

Until recently, expats who had permanently left South Africa and completed tax emigration to become non-tax residents could typically withdraw their entire retirement savings, subject to the three-year lock-in rule.

What are the fundamental changes introduced by the two-pot retirement system?

The new two-pot system is a game-changer, offering South Africans the opportunity to access a portion of their retirement savings without the need to quit their job or cash out their entire pension. This system, which came into effect on September 1, 2024, is not just about flexibility, but also about empowering you to make the most of your financial future. For expats, understanding these changes is crucial, but it’s also a reason to feel hopeful about your retirement plans.

The two-pot system aims to provide flexibility for retirement fund members while ensuring long-term financial security. Let’s take a look at how the two-pot retirement system works:

• Two components: Contributions made after September 1, 2024, are divided into two parts: a savings component and a retirement component.
• Savings component: This portion is intended for short-term needs like emergencies or financial difficulties. You can access these funds before retirement.
• Retirement component: This portion is meant to be saved for retirement. You generally will be able to access these funds once you retire.
• Allocation: One-third of your contributions will go to the savings pot, while two-thirds will go to the retirement pot.
• Vested component: Any contributions made before September 1, 2024, will be kept separate in a “vested pot.” These funds will follow the same rules as before the two-pot system was introduced.

Read more: South African expat retirement planning – what you need to know about withdrawing your RA in 2024.

South African retirement annuity rules: Three-year lock-in rule clarification

One of the most significant changes is clarifying how the three-year lock-in rule applies to expats’ early withdrawals of retirement annuity funds.

Vested component

• No lock-in: Unlike the retirement component, there’s no three-year waiting period to access the vested component.
• It’s important to note that the existing rules continue to apply to the vested component of your retirement savings. This consistency provides a sense of security and familiarity, ensuring that you can still rely on the rules that were in place before the two-pot system was introduced.

Retirement component

• Three-year requirement: Expats generally must wait three years after becoming non-residents to withdraw funds from the retirement component.
• SARS non-residency: Confirmation of non-residency status by SARS is essential.

Savings component

• Annual withdrawals: You can withdraw funds from your savings pot once a year.
• Multiple policies: If you have multiple retirement policies, you can withdraw from each one annually.
• No lock-in: There’s no waiting period to access your savings component.

Okay, but what does this two-pot system mean for expats?

For expats, this means you should seriously review your financial plans, as these new rules might require adjustments. You can access at least some of your retirement annuity funds without interference from the three-year lock-in generally required for recent emigrants. This could significantly impact your financial planning and tax obligations.

It is essential to stay informed of any changes or clarifications from the Treasury as the system rolls out, and given the complexity of the system, consulting with financial advisors and tax experts is recommended.

Explaining the two-pot system: what you need to know about withdrawals

On August 31, 2024, a one-time transfer of 10% of your vested retirement savings was made to the savings component. This transfer was capped at R30,000.

How do you access the savings pot?

• Immediate access: Under certain conditions, you can access the savings pot immediately.
• Withdrawal limits: Withdrawals are allowed once per tax year and are subject to income tax. There’s a tax-free allowance of R27,500.
• Tax on withdrawals: If you want to withdraw funds from the savings pot, the lump sum withdrawal will be taxed according to the SARS Retirement Lump Sum Withdrawal Tax Table.

How do you access the retirement pot?

• Access upon retirement: Generally, funds in the retirement pot can only be accessed upon retirement.
• Annuity purchase: The entire retirement pot must be used to purchase an annuity.
• Exception for emigrants: If you emigrate from South Africa and can prove non-residency for three years, you may access both the retirement pot and any remaining funds in the savings pot as a lump sum.

Critical requirements for withdrawing your retirement savings early as an expat

• Proof of non-residency: A Non-Resident Confirmation Letter from SARS is compulsory for withdrawing funds.
• AIT TCS PIN: You’ll need an Approval International Transfer (AIT) TCS PIN to transfer funds abroad.

Can expats still cash in their total retirement annuity value after tax emigration?

Yes, South African expats who have ceased being tax residents can still cash in their full retirement annuity value under specific conditions. The primary requirement is to meet the three-year lock-in rule. This means you must have been a non-resident for at least three consecutive years before withdrawing your retirement funds.

Once this condition is met, you can typically access your entire retirement savings, including any funds in the vested, savings, and retirement components of the two-pot system.

However, it’s important to note:

• Tax implications: There are tax implications associated with withdrawing your retirement funds, especially if you’re a non-resident. It’s advisable to consult with a tax professional to understand the specific tax rules that apply to your situation.
• Documentation: You must provide proof of non-resident status to the South African Revenue Service (SARS) and may require additional documentation for international transfers.

FinGlobal: retirement annuity withdrawal specialists for expats

Making sense of the complexities of South Africa’s retirement system can be daunting, especially for expats. To ensure you understand the rules, minimise tax implications, and streamline the retirement withdrawal process, FinGlobal is ready to assist. Our expert team provides personalised guidance and support to help you make informed decisions about achieving your financial objectives.

To learn more about our cross-border financial services for South Africans worldwide, leave your contact details below, and we’ll contact you!