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South African Retirement Annuity

Everything you need to know on how to cash in your retirement annuity when financially emigrating from South Africa.

Can you cash in your retirement annuity?

As a South African resident, you have very limited access to retirement annuities in South Africa before you reach the age of 55. However, once you have formalised your financial emigration, you become eligible for early withdrawal of your retirement annuity, which allows you to access and transfer these funds abroad as part of your foreign capital allowance.

Rules around retirement annuity funds in South Africa

The Income Tax Act (58 of 1962) only allows for two instances when you can make an early withdrawal and gain access to the full value of the retirement annuity before retiring:

  • If, as a South African resident, you complete the financial emigration process. This is a South African exchange control process which is regulated by the South African Reserve Bank (SARB).
  • If you gained access to South Africa based on a residency or employment visa, and that visa formally expires.

The South African Revenue Service (SARS) has stipulated administrative requirements that must be met before the insurer/administrator of the retirement annuity fund can pay out the full fund value.

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What is a retirement annuity?

A retirement annuity is a product offered by insurance companies, as a tax efficient savings vehicle for retirement. Retirement annuities in South Africa are governed by the Income Tax Act (58 of 1962).

It’s not linked to employment – however, an employer can also contribute to a person’s retirement annuity. Part of having a retirement annuity means you enjoy a tax deduction in South Africa for contributions made (which is only beneficial if income is earned in South Africa). Access to the funds in the retirement annuity is strictly legislated, so as a rule it’s only accessible after the age of 55 when the retirement date is met. Even then, access is limited.

The fund rules that govern retirement annuities in South Africa will define the retirement date. It’s generally when you reach the age of 55 and then only after completing the administrative requirements to action the retirement. Each fund’s rules are different and therefore it is important to consult prior to making any decisions and taking any action.

You won’t be able to cash in your retirement annuity until you retire – unless you are totally disabled. In that case, the rules do allow you to encash your retirement annuity.

Once the retirement date is reached you’ll be able to access a maximum of one third of the funds in the retirement annuity as a lump sum. This will be subject to income tax, determined by a tax table specifically applicable to retirement lump sums.

The remaining funds in the retirement annuity must be then be used to provide you with a monthly pension for your lifetime, which also is fully taxable. You can also decide to apply the full fund value towards the monthly pension provision. It isn’t compulsory to take a lump sum upon retirement.

Is it only South African residents that can financially emigrate?

No, if you gained entry to the country with the intent to live and work here on a permanent basis, and that a declaration was made when you entered South Africa, you will generally be treated as a South African resident for emigration purposes.

If you entered with the intention to remain on a temporary basis only (e.g. on a temporary work contract), you will not be able to financially emigrate. If you want to encash your retirement annuity you would have to rely on the visa expiry route to gain access thereto. If you leave South Africa prior to the visa expiring, you will not be able to access the retirement annuity.

What if I left South Africa without financial emigration?

Many South African residents have already left South Africa without recording their financial emigration, as it didn’t seem necessary at the time. If you left South Africa without emigrating and you now wish to access your retirement annuity, you will have to financially emigrate and meet all the administrative requirements pertaining thereto.

What if I did not cash in my retirement annuity during my financial emigration?

If you have emigrated years ago, you will still be able to encash your retirement annuity if you have not reached the age of 55.  Certain documentation will have to be provided to the South African Revenue Service.

What if I financially emigrate from South Africa after retirement?

Accessing funds in the retirement annuity due to financial emigration is only possible if it occurs prior to retirement age. If you have reached retirement age, the post-tax lump sum (if any) will be remittable as part of your foreign capital allowance. If you are receiving a monthly income, the income will be remittable (after tax) and the underlying capital will need to remain in South Africa.

Rules around retirement annuity funds in South Africa - during and after financial emigration

The fund will complete a Request for a Tax Deduction Directive – Retirement Annuity Funds (Form C), which is a form provided to the administrator by SARS.

If you’re in the process of emigrating, you’ll need the following supporting documents:

  • Tax clearance certificate (IT21(a)) – Application Form for Tax Clearance Certificate, and
  • A signed and bank stamped form MP336 (b) – Request for settling in allowance – that was submitted to the Authorised Dealer (i.e. a local commercial bank).

Note: If you’ve already financially emigrated, here’s what you’ll need:

  • The member’s certificate of residency obtained from the relevant tax authority of the country in which the member now resides.  The certificate of residency will only be accepted if it is issued in accordance with the Double Taxation Agreement between South Africa and your country of residence.
  • Copy of the Tax Clearance Certificate – Emigration issued by SARS.

If you are unable to produce a Tax Clearance Certificate, an affidavit will be required indicating the reason why the Tax Clearance Certificate cannot be provided.

The administrative requirements to access funds due to the expiry of a visa:

The fund will complete a Request for a Tax Deduction Directive – Retirement Annuity Funds (Form C), and the following supporting documents will be required:

  • A copy of the certificate of residency obtained from the relevant tax authority of the country where the member permanently resides;
  • A copy of the passport validating the exit from South Africa;
  • A copy of the South African Visa indicating the expiry date and the applicable paragraph in the definition of “Visa” in S1 of The Immigration Act (13 of 2002) in terms of which the “Visa” was issued.

Note: If you belong to more than one retirement annuity, there is no rule that forces you to make a withdrawal from all funds at the same time. You can action the withdrawals as and when you find it necessary.

This can be useful where an emigrant has already used the emigration allowance in the given year and where all excess funds are paid into an emigrant’s capital account. The retirement annuity may provide a better net return than the emigrant’s capital account since there is no income tax payable on the returns generated in the fund. However, each case will be evaluated based on its own merits.

What is the tax payable if you encash a retirement annuity in South Africa?

The full fund value will be accessible when all the requirements for withdrawal are met.

The income tax payable on the lump sum is determined by applying a tax table specific to retirement fund withdrawals, which is contained in the Second Schedule to the Income Tax Act (58 of 1962. The larger the value of the lump sum, the higher the tax bracket and tax rate that is payable. The tax table is as follows:

 

Retirement annuity amount Tax Rate
First R25 000 0%
R25 000 – R660 000 18% above R25 000
R660 001 – R990 000 R114 300 + 27% above R660 000
R990 001+ R203 400 + 36% above R990 000

 

Note: When applying the tax table to the lump sum amount, aggregation applies. This means that all previous retirement fund lump sums previously received are added together, resulting in a higher tax bracket. The lump sums that will contribute towards aggregation are as follows:

  • Retirement lump sums received after 1 October 2007,
  • Withdrawal lump sums received after 1 March 2009,
  • Severance benefit lump sums received after 1 March 2011.

Any lump sums received prior to the dates will not contribute towards aggregation.

The aggregation rule was implemented to discourage people from accessing their retirement funds prior to formal retirement.

SARS keeps record of a previous lump sums received, so it’s important to obtain the correct information; as this can have a significant impact on your tax payable on the lump sum being withdrawn.

What is the penalty for the encashment of a retirement annuity before the contractual retirement date?

Penalties may vary between 0% and 30% when you encash/cancel a retirement annuity policy. The penalty can be determined prior to you making a decision, to encash/cancel the retirement annuity.

What fees will FinGlobal charge to assist with this process?

We will provide you with an initial no-cost, no-obligation free consultation. Once your needs have been determined and assessment completed you will be provided with a quote. 

Once you accept the quote, fees are only payable upon successful completion of our service and can be paid from your fund proceeds. We do not work on a commission-based system, our fees are fixed and transparent and will always be clearly communicated to you.

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