Retirement annuities and emigration
A retirement annuity (RA) is a long-term investment designed to help individuals save for retirement. Contributions grow tax-free, meaning no tax is paid on interest, dividends, or capital gains while the funds remain invested. Typically, these funds can only be accessed from the age of 55. However, individuals who have ceased South African tax residency and remained non-resident for at least three consecutive years may withdraw their retirement annuity before reaching retirement age.
Updates to emigration withdrawal rules
Regulations around retirement fund withdrawal have changed significantly in recent years. Previously, early access to RA funds required a process known as ‘financial emigration’ through the South African Reserve Bank (SARB), which confirmed that an individual had permanently emigrated and allowed certain assets to be transferred abroad.
This framework was phased out on 1 March 2021. Today, access to retirement funds before retirement age depends on whether an individual has ceased South African tax residency and remained non-resident for an uninterrupted three-year period. These changes have simplified the regulatory framework, while making your SARS tax status the key factor in determining whether retirement funds can be accessed early.
The three-year waiting period
As of 1 March 2021, individuals who have ceased their South African tax residency must remain non-residents for three consecutive years before they are allowed to withdraw funds from a retirement annuity. The three-year waiting period begins on the date your South African tax residency is deemed to have ceased, which may differ from the date you physically leave the country. After this three-year period, the full value of the RA can typically be withdrawn before reaching retirement age.
Although this waiting period may be frustrating for some expats, the funds are not simply left idle. Your retirement annuity remains invested during this time and continues to grow according to the fund’s investment strategy. As a result, the value of your savings can fluctuate before withdrawal, depending on market performance.
For some expats, this waiting period could create liquidity challenges if they expected to access their funds shortly after emigrating. On the other hand, it may also allow their investment more time to grow.
Ceasing South African tax residency
Simply moving abroad does not mean you are no longer a South African tax resident. SARS determines tax residency using two main tests:
- The ordinary residence test determines whether South Africa is your primary home based on where your personal and financial ties are located.
- The physical presence test assesses how much time you actually spend in South Africa over several tax years.
Under the physical presence test, a person who leaves South Africa and remains outside the country for at least 330 full consecutive days will cease to be regarded as a tax resident, provided they are not considered ordinarily resident in South Africa. However, to access retirement funds, they must officially update their tax status with SARS and get confirmation that they are no longer considered South African tax residents.
Tax implications of withdrawing your retirement annuity funds
Retirement annuity investments grow tax-free while the funds remain invested. However, tax becomes payable when you withdraw money from the annuity. In South Africa, lump-sum withdrawals are taxed according to the SARS retirement lump-sum tax tables.
A portion of the withdrawal may be tax-free, with the remaining amount taxed on a sliding scale. When calculating the tax payable, SARS considers all previous lump-sum withdrawals from retirement funds, meaning earlier withdrawals can reduce the tax-free amount available.
The final tax amount depends on factors such as the size of the withdrawal, your age, previous withdrawals, and the applicable SARS tax tables, which can be viewed here. Expats should also be aware that certain jurisdictions may tax foreign retirement withdrawals, so it’s important to consider the potential tax implications in their new country of residence.
The withdrawal process
Withdrawing a retirement annuity after emigrating typically involves several steps:
- Formally cease South African tax residency and ensure your status is updated with SARS.
- Remain a non-resident for a waiting period of three consecutive years.
- Once the waiting period has passed, you can apply to your retirement fund administrator to withdraw the funds.
The administrator will then request a tax directive from SARS, which specifies the tax that must be withheld before the funds can be paid out. You may also need to provide supporting documentation, such as proof of foreign tax residency, travel records or other evidence confirming your non-resident status.
Future Forex can assist with strategic considerations
Deciding whether to withdraw a retirement annuity after emigrating requires careful consideration.
Withdrawing your retirement annuity after emigrating can provide access to capital and allow you to move assets offshore, but it may also reduce long-term retirement savings due to taxes and the loss of future investment growth. In some cases, leaving the funds invested in South Africa until retirement may be more tax-efficient, so factors such as currency exposure, international tax obligations and long-term retirement goals should be carefully considered.
This can feel like an overwhelming task, but it doesn’t have to be. Simplify the process and let our team of emigration and foreign exchange experts assist. From guiding you through SARS tax residency applications to assisting with cross-border transactions and regulatory paperwork, our team will ensure your financial transition is as seamless as possible.
