Emigration and your retirement fund


There is ongoing uncertainty on how retirement investors can access their savings on emigration. Given our country’s history of exchange controls and the restrictions that apply to retirement savings, concern on this matter is understandable.

In the past, the South African assets (including retirement savings) of persons emigrating from this country were “blocked” and had to be handed over to an Authorised Dealer. These assets could not be taken out of South Africa without Reserve Bank approval, only the income earned on these assets.

These rules have been relaxed. Today, emigrants qualify for a cash allowance equal to their travel allowance (currently R4m pa). They also qualify each calendar year for a “foreign capital allowance” of R8m per family unit, or R4m per person (if a single person is emigrating). These limits should cover most people’s retirement savings. Any excess will be held in a non-resident bank account (formally known as a “blocked rand” account).

Presently, cashing in your retirement savings is relatively simple if you belong to your employer’s pension or provident fund. On resigning, you simply withdraw from your employer’s pension or provident fund. The proceeds will be taxed according to the withdrawal lump sum tax table, and you may then invest the balance outside South Africa.

The same applies if you have money invested in a preservation fund: provided you have not yet exercised your one withdrawal from the preservation fund, you can simply withdraw the full amount, net of tax. If you have made your one-withdrawal (for each transfer to the preservation fund) then you would have to retire from the fund in the same way that you would retire from your employer’s pension or provident fund (see below).  There are two loopholes however: you can transfer your (pension/provident) preservation fund to your current employer’s (pension/provident) retirement fund before resigning from that fund; or you can transfer to an RA fund and then follow the process relating to RAs described below.

Back to your employer’s pension or provident fund:  if you have reached the minimum retirement age stipulated by your employer’s fund rules or legislation, you can also choose to retire at that point, and benefit from the more favourable retirement lump sum tax table. But matters may then become slightly more complicated, depending on whether you are a member of a pension or a provident fund.

If you belong to a provident fund, it remains straightforward as you have the option to take the entire amount as a cash lump sum. But if you retire from a pension fund, you are obliged to invest at least two-thirds into an annuity, either a compulsory or a living annuity.

If you purchase an annuity, the underlying assets cannot be converted back into a cash lump sum. You will therefore be stuck with an annuity that pays out (and is taxed as income) in South Africa. The onus will then be on you to expatriate these proceeds on a monthly or annual basis. This is costly and an administrative hassle, as you have to apply for each transfer separately. If you have gone through the financial emigration process, you will be required to operate these affairs through a non-resident bank account.

Generally, you do not have the option to “withdraw” from a retirement annuity fund. You may not access your funds before the age of 55, unless the value of your benefit falls below a limit specified by the Minister (currently R7 000), you qualify for reasons of ill-health or you decide to emigrate. You may only “retire” from the fund from the age of 55 years. If you retire, you must purchase an annuity with at least two-thirds of your proceeds (unless the RA value is less than R247,500), with the same consequences as buying an annuity out of your pension or pension preservation fund proceeds.

Table: Lump sum tax tables (2015)

On withdrawal Applicable tax rate At retirement
R0 – R25 000 0% R0 – R500 000
R25 000 – R660 000 18% R500 001 – R700 000
R660 001 – R990 000 27% R700 001 – R1,050 000
+R990 001 36%

To access your RA as a cash lump sum on emigration, you had to go through the formal financial emigration process with SARB/SARS.

The 2015 Tax Law Amendment Act introduced a change to the Income Tax Act that effectively allowed individuals to withdraw a lump sum from the retirement annuity fund without going through the formal financial emigration process. The definition of “retirement annuity fund” instead provided that individuals could withdraw a lump sum from their retirement annuity fund when:

  1. the individual ceases to be tax resident; or
  2. the individual leaves South Africa at the expiry of the work visa contemplated in the Immigration Act, 2002.

This was not the policy intention, however, and it created a loophole for South African nationals or tax residents to withdraw early from their retirement annuity funds, without formally emigrating.

To make the policy intention clear, the definition of “retirement annuity fund” in section 1(b)(x)(dd) is to be amended to include the requirement that an individual must emigrate from the Republic and that emigration must be recognised by the South African Reserve Bank for purposes of exchange control, for individuals to withdraw a lump sum from their retirement annuity fund. The proposed amendments are deemed to have come into effect on 1 March 2016 and applies in respect of years of assessment commencing on or after that date.

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