What happens to my Retirement Funds when I emigrate?

For most retirement fund members leaving South Africa the question on their minds is what happens to their retirement fund benefits.

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With the increasing economic uncertainty in South Africa contemplated emigration is becoming the new norm as South Africans search for greener pastures overseas. For most retirement fund members leaving South Africa the question on their minds is what happens to their retirement fund benefits.

RETIREMENT FUND LEGISLATION WHEN EMIGRATING

The legislation governing retirement funds has evolved over time to make it more streamlined for members to access their benefits when emigrating. Before 2008, a retirement fund member was not permitted to withdraw their benefit from that fund when formally emigrating. This was changed in 2008 to allow only retirement annuity fund members to withdraw their benefits when emigrating. As of March 2019, legislation was enacted to allow all retirement fund members to access their retirement benefits when emigrating subject to the emigration being recognised by the South African Reserve Bank (“SARB”) for the purposes of exchange control.

The most recent legislation prescribes that a member who formally emigrated before 1 March 2019 and who has previously made one pre-retirement withdrawal from their pension or provident preservation fund will be able to withdraw their full lump sum benefit from that preservation fund from 1 March 2019 if all the administrative requirements are met. Furthermore a member who is still in the process of emigration and who has previously made one pre-retirement withdrawal from their pension or provident preservation fund will be able to withdraw their full lump sum benefit from that preservation fund once the formal emigration process is completed and all the administrative requirements are met.

OPTIONS IN RESPECT OF WITHDRAWING YOUR RETIREMENT FUNDS

Retirement fund members considering emigration prior to the age of retirement need to be aware of the tax implications when commuting their lump sum benefits. The lump sum benefits can either be taxed using the withdrawal lumpsum tax tables or the retirement lumpsum tax tables and therefore it is important to know where each table applies. When emigrating the concession to withdraw your retirement funds are taxed in terms of the withdrawal lump sum tax table, which are taxed at a higher tax rate than the retirement lump sum tax table that are applied upon retirement. The tax consequences for commuting lump sum benefits and the relevant tax table are summarised in the following options:

Withdrawal before retirement

When withdrawing from any retirement fund before age 55 a member’s benefit will be taxed as per the withdrawal lump sum tax table. The first R25000 of the lumpsum is tax free and any amounts above this are taxable on a sliding scale between 18-36%.

Withdrawal from provident and provident preservation funds

At retirement (after age 55), provident funds or preservation provident preservation funds rules allow for a member to commute the full benefit as a cash lumpsum which is taxed according to the retirement lump sum tax table. The first R500 000 of the lumpsum is tax free and any amounts above this are taxable on a sliding scale between 18-36%.

Retirement from pension, pension preservation and retirement annuity funds

For members of a pension fund, pension preservation fund and retirement annuity fund it should be noted that the annuitisation rules apply upon retiring (after age 55). This means that you are allowed to commute a lump sum equal to a maximum of one-third of the retirement fund, unless the entire value of the fund does not exceed R247 500 and in this case you may take the full retirement interest as a lump sum. The lump sum is taxed according to the retirement lump sum tax table. The first R500 000 of the lump sum is tax free and any amounts above this are taxable on a sliding scale between 18-36%.The remaining two-thirds of the retirement fund in respect of pension, pension preservation or retirement annuity is received in the form of an annuity which is taxed as income in your hands upon receipt. Pensioners may have their retirement annuity income paid to them in the country of residence but may not access the underlying capital. This means that is you have retired and elected to commute the above-mentioned portion of your funds into an annuity, those funds are locked into an annuity upon emigration.

PROPOSED TAX REFORMS AFFECTING RETIREMENT FUNDS WHEN EMMIGRATING

Typically, the exchange control process triggered the emigration withdrawal allowance prior to retirement, but National Treasury announced that they would be phasing out the SARB process of financial emigration, hence affecting the ability to encash retirement funds upon emigration. Proposals to amend the income tax legislation may be incorporated as early as the 1st of March 2021 which may restrict the withdrawal from retirement funds for a three-year period when emigrating. This new rule will result in retirement fund members having to prove to SARS that they have been a non-resident for a period of three years before they can withdraw their funds based on emigration if a that member is still under the age of 55. This restriction period will no doubt have a negative impact on the emigration financial plans of retirement fund members who are considering permanent departure and it is therefore important to plan around this as early as possible to avoid financial difficulties when emigrating.

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Mbonisi Tshabalala

Wealth Advisor, Sasfin Wealth

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