Given South Africa's growing social and economic challenges an increasing number of people are looking to permanently move abroad. Amendments to regulations regarding emigration and access to retirement funds have added a level of uncertainty and anxiety, especially during an emotionally stressful time when fund members are considering emigrating. This article explores the broad options available to retirement fund members and how the regulatory changes may affect members who are contemplating emigrating or who have already left the country.
Retirement fund members considering emigration before the normal age of retirement need to be aware of the tax implications when electing to withdraw or commute lump sum benefits. Lump sum benefits can either be taxed using the withdrawal lump sum tax tables or the retirement lumpsum tax tables and therefore it is important to know when each table would be applicable. Upon emigration, the concession to allow the untimely withdrawal of your retirement funds means that your withdrawn lump sum is taxed according to the withdrawal lump sum tax table, which is taxed at a higher tax rate than the retirement lump sum tax table that would usually be applied upon retirement.
The tax consequences for withdrawing and commuting lump sum benefits and the relevant tax table are summarised under the following options:
When withdrawing benefits 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 lump sum is tax-free and any amounts above this will be taxed 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 withdraw 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 withdraw the full retirement interest as a lump sum. The withdrawn lump sum is taxed according to the retirement lump sum tax table.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 who have emigrated may have their living annuity income paid to them in their country of residence but may not access the underlying capital. This means that if you have retired and elected to commute the allowable lump sum, and the balance of your funds is transferred into a living annuity, those funds are locked into the annuity despite emigration.
As of 1 March 2021, provident funds have become subject to the same rules at retirement as pension funds and retirement annuities, except where a provident fund member is age 55 or older on 1 March 2021 and remains a member of the same provident fund. For members under age 55 on 1 March 2021, all accumulated member benefits plus any future growth on those benefits as of 28 February 2021 will be given vested rights and the full benefit can be commuted as a cash lump sum which 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%.
Adjustments to legislation governing emigration and access to retirement funds came into effect on 1 March 2021. This legislation now requires retirement fund members to prove to SARS that they have been a non-resident for three years before they can withdraw their funds based on emigration if that member is still under the age of fifty-five. The accessibility referred to above only pertains to retirement annuity funds and preservation funds. It does not apply to living annuities. Living annuities are only accessible if the fund value is below R125 000.
The accessibility referred to above only applies before retirement and once a member has retired from their retirement annuity fund or preservation fund, the 3-year rule will have no further relevance. This restriction period will no doubt have a negative impact on the 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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