Once a South African citizen has emigrated from the Republic of South Africa, and that emigration is formally recognised by the South African Reserve Bank (SARB) for purposes of exchange control, they are eligible to apply for the early withdrawal of their retirement annuities. 

But what are the financial implications that South African expats face when they cash in their annuity early? 

The different retirement vehicles will have different tax implications. A pension, provident and preservation fund each have different rules that apply when an individual wants to withdraw their funds. 

Many South Africans make use of their retirement lumpsum to financially assist them in the early years of emigration or to set them up for financial success in a new country.

Pension Fund

A pension fund is a retirement fund that receives frequent contributions from you and your employer. If you leave a company before you retire, for example when you resign, you may have to move your retirement savings out of the company fund. You can move your savings either to:

  1. Your new company’s pension fund
  2. A preservation fund or to a retirement annuity fund

Provident Fund 

A provident fund is the same as a pension fund, but differs in that when you resign or retire, you can take the entire lump sum as cash, which you’ll be taxed on. You don’t need to purchase an annuity.

Preservation Fund 

This is a retirement fund which is specifically designed to receive lump sum benefits from a pension or provident fund when you resign from your employment before retirement. While the funds are in the preservation fund, the capital continues to grow. You can make one partial or full withdrawal from the fund before you reach age 55. After that, you can only access the balance after age 55. 

The rules and tax implications upon cashing out your pension, provident or preservation fund early

Reynier Hugo, Certified Financial Planner at Alexander Forbes, told Business Insider: “The usual restrictions of not being allowed to withdraw before age 55, as well as the one-third maximum cash lump sum withdrawal, with the rest to buy a pension, does not apply to individuals who are formally emigrating. However, the amount received will still be subject to tax in South Africa. The tax will differ from the type of Retirement Annuity or Fund the South African expat is part of.” 

There are two different tax tables that are applied to lump sum benefits received, of which one being for lump sums received from a pension, pension preservation, provident, provident preservation, or retirement annuity fund on withdrawal and the other being for receipt of such lump sums on death, retirement, or termination of employment.

We are going to focus on the first tax table mentioned above. 

According to SARS (2020), for the 2020 tax year of assessment, the first R25,000.00 of the withdrawn amount would be exempt from tax. Thereafter, any amounts more than R25,000.00 will be taxed on a progressive scale starting at 18%. 

Where the applicant is a member of a pension, provident or retirement annuity fund, the following particulars in respect of each fund must be submitted on a separate sheet:

•    Name of fund,
•    Expected lump sum amount to be paid out; and
•    Date of expected payment.

Keep the following information readily available when applying to withdraw from your annuity or fund. 

The different retirement vehicles also face different implications upon withdrawal of the lump sum. 

Pension Fund

It is important to note that emigration alone will not result in the authorisation of a member withdrawing their full amount before their retirement age. The fund member must firstly terminate their employment contract.  

The lump sum will be regarded as capital and depending on the other capital remitted abroad, may require an application to be made to the SARB for remittance (R10million per annum). The member can transfer the lump sum after tax deductions, and the pension income out of South Africa. 

For assistance with taxation on your pension fund, get in touch with us today.

Provident Fund 

Upon terminating employment, and thereby leaving an employer’s provident fund, the fund member is entitled to withdraw their full retirement interest in the provident fund as a lump sum. 

The fund member of a provident fund can transfer the full lump sum after tax deductions out of South Africa. This lump sum will be regarded as capital, and depending on the other capital remitted abroad, may require an application to be made to the SARB for remittance if it exceeds R10 million per annum. For guidance on how to determine exactly how taxation on your provident fund lump sum will work, get in touch with us here.

Preservation Fund 

This fund serves as a savings vehicle into which proceeds from a pension or provident fund are paid. 

Additional contributions from a preservation fund are not permitted, and there are no tax consequences on the transfer of a full retirement interest from the pension or provident fund to a qualifying pension preservation or provident preservation fund. 

Since the 1st of March 2019, it’s been possible for a member to gain full access to a retirement interest in a preservation fund after they formally emigrated. This will still be possible even if the one withdrawal option has already been used. 

If a member retires from a preservation fund after they formally emigrated from South Africa for exchange control purposes, the rules apply to retirement in the event of a pension preservation fund and thus will be the same for the pension fund. In the event of a provident preservation fund, it will be the same as a provident fund. 

On the 1st of March 2021, a new tax bill law will be implemented. You can read all about it here.

We treat every individual’s formal emigration process with the attention to detail it deserves. If you need clarity on how emigration will impact you and your Pension Fund, Provident Fund or Retirement Annuity, get in touch with us today.

Resources: 

https://www.sars.gov.za/ClientSegments/Individuals/Tax-Stages/Pages/Tax-and-Retirement.aspx

https://www.oldmutual.co.za/articles/pension-provident-funds-ras

For a free, non-obligatory consultation, contact us today: info@randtangle.com | +27 (0) 87 135 5978