If you’ve packed up your life in South Africa and settled in a new country, chances are you’ve thought about what to do with the retirement annuity that you left behind. One of the biggest sources of confusion for expats is the difference between tax residency and permanent residence – and why it matters when it comes to accessing your retirement savings.
Let’s clear it up. These two terms might sound similar, but they’re not the same thing. And when it comes to withdrawing your RA after emigrating, it’s tax residency that counts – not whether you’ve been granted permanent residence in your new country.
What is tax residency?
Think of tax residency as the country that gets to tax your worldwide income. It’s about where you’re considered a taxpayer – your country of tax residence.
Every country has its laws for deciding this, but most rules look at things like how many days you spend there each year or whether that’s where your home base is.
The South African tax residency test uses two main checks:
- The ordinarily residence test – where do you usually live and consider “home”?
- The physically present test – have you spent a certain number of days in South Africa over a set period?
If you don’t meet these criteria, you may be seen as a non-tax resident of South Africa, even if you’re still a South African citizen. On the other hand, if you do meet the criteria, you will be considered a South African tax resident, even though you might live abroad.
Read more: South African tax residency rules – expats, are you still tax residents of South Africa?
What is permanent residence?
Permanent residence is an immigration status. It gives you the legal right to live in another country indefinitely. To get this status, you usually have to apply and meet requirements like working in the country, having close family ties there or investing a certain amount.
But here’s the key thing – having permanent residence doesn’t automatically make you a tax resident. You could hold permanent residence but never actually move there long-term, meaning you wouldn’t be considered a tax resident of that country.
Residency vs citizenship – what’s the difference?
It’s easy to mix up residency vs citizenship. Citizenship gives you a passport and political rights in a country, while residency is simply about where you live. Tax authorities don’t care about citizenship – they care about residency for tax purposes.
That’s why a South African citizen living and working overseas could still become a tax resident of their new country, even if they don’t take up citizenship there.
Why tax residency matters for your retirement annuity
When you want to cash in your South African RA after moving abroad, SARS doesn’t care about your permanent residence status – what matters is whether you’ve become a tax resident somewhere else.
Here’s why:
- If you’re still a South African tax resident, you can only access your RA once you reach retirement age. At that point, you may withdraw up to one-third as a cash lump sum, while the remaining two-thirds must be used to buy an annuity that pays you a pension income in retirement.
- If you’ve become a non-tax resident of South Africa, you can withdraw the full value of your RA (after tax). You can only do this once you’ve been a tax resident of another country for at least three consecutive years.
It’s also worth noting that, regardless of your tax status, any retirement annuity withdrawal payout will always be taxed in South Africa.
Read more: Five steps to withdrawing your retirement annuity from South Africa.
The three-year rule – how it works
To make a full RA withdrawal after emigrating, SARS requires that you have been a tax resident in your new country for at least three consecutive years.
This is often misunderstood. Many people think that getting permanent residence abroad is enough – but it’s not. You have to live there and meet the country of tax residency, meaning as defined by that country’s laws.
How other countries decide tax residency
While the exact rules differ, most countries use similar tests:
- Spending at least 183 days in a year there
- Establishing a home or family ties
- Proving that your “centre of life” is now in that country
So, before you start the process, make sure you understand the rules regarding your country of residence for tax purposes.
Why cross-border tax planning is essential
Managing tax residency in South Africa alongside your new country’s tax rules can get complicated. Add in Double Tax Agreements (DTAs) and exchange control regulations, and it’s easy to see why expert help makes sense. Speaking to professionals who understand cross-border tax planning and international tax consulting can save you a lot of stress – and possibly a lot of money.
Read more: Leaving the rainbow nation: what you need to know about tax residency and expat tax planning.
Resident vs non-resident – what it means for income tax
One last thing to remember:
- A resident pays tax on their worldwide income.
- A non-resident pays South African tax only on income sourced in South Africa.
Because a retirement annuity withdrawal is always South African-sourced, SARS will tax it no matter where you live. Your tax residency only changes your access. If you remain a South African tax resident, you can only withdraw at retirement age, and just one-third can be taken in cash. Cease your tax residency in South Africa and, after three years as a tax resident elsewhere, you can withdraw the whole amount – still subject to South African tax.
Long story short?
Permanent residence is about your right to live in a country. Tax residency is about where you pay tax. For South Africans abroad wanting to access their retirement annuity, it’s your tax residency in another country – for at least three years – that matters most.
FinGlobal: retirement annuity encashment specialists
Thinking about making the most of your retirement savings after moving abroad permanently? FinGlobal’s team of tax and exchange control specialists can guide you every step of the way to accessing your funds – from tax emigration to retirement annuity withdrawal, including tax clearance and international money transfers. We’ll make sure your cross-border finances are compliant, efficient, and stress-free – so you can enjoy the next chapter wherever you’ve chosen to call home.
Interested in learning more about FinGlobal’s retirement annuity withdrawal services? Leave your contact details below, and we’ll be in touch soon!