Picture: 123RF
Picture: 123RF

If you are planning to move abroad, accessing your retirement funds (pension preservation funds, provident preservation funds and retirement annuities) will be more challenging from 2021.

Retirement funds form a big part of the investments of many South Africans. Investors benefit from tax-deductible contributions and enjoy tax-free interest, dividends and capital gains on investment growth. Retirement funds have thus always been a savvy investing tool.

However, should you be considering emigration, accessing your retirement funds is about to become more onerous. The 2020 draft Tax Laws Amendment Bill has been published by the National Treasury and SA Revenue Service (Sars). This draft looks to add an additional hurdle for SA residents looking to take their retirement funds abroad. The change, which will come into effect from March 1 2021, restricts those who have financially emigrated from withdrawing their retirement funds until three consecutive years have passed. After this period, an individual will need to prove they are non-SA resident for tax and exchange control.

In SA, retirement funds are governed by various pieces of legislation, including the Pension Funds Act of 1956 and the Income Tax Act of 1962. These laws make provision for accessing your retirement funds under the following circumstances:

  • Early withdrawals (before age 55). Pension preservation fund/provident preservation fund members may make a one-off partial or full withdrawal. Retirement annuities with a value below R7,000 can be accessed in full. Members may be able to retire early from their retirement funds due to ill health. Accessing retirement funds early is typically discouraged and is therefore subject to a higher tax rate.
  • Retirement (from age 55). Pension preservation fund or retirement annuity members may take a maximum of one-third of the investment as a cash lump sum. The remaining two-thirds must be used to purchase a living annuity or life annuity in SA. Provident preservation fund members are allowed to redeem the full investment as a cash lump sum. Retirement withdrawals are subject to tax. The tax rates are more favourable on retirement as opposed to early withdrawals.
  • Emigration. Under the current provision of the Income Tax Act, a person is allowed to withdraw their retirement funds where they “is (or was) a resident who emigrated from the republic and that emigration is recognised by the SA Reserve Bank for purposes of exchange control”. The stipulation allows people to withdraw their retirement funds once they have undergone the process of financial emigration. Financial emigration refers to ending your residency status with the Reserve Bank and Sars.

The new provision amends the definitions under the current Income Tax Act as follows: people are allowed to withdraw their retirement funds where they “is (or was) not a resident who emigrated from the republic and that emigration is recognised by the SA Reserve Bank for purposes of exchange control for an uninterrupted period of three years or longer”.

The Treasury aims to renew the processes about financial emigration by restricting access to retirement funds. Under the new regulations, you will have to prove your non-residency after a period of three consecutive years. This idea was initiated in the February budget speech with the intention of introducing a new system from March 1 2021.

After public comment on the 2020 draft of the bill, the Treasury has confirmed that the amendment will come into effect from that date.

Pension preservation fund or provident preservation fund members (with no prior withdrawals) will still be granted access to their retirement benefit should the amendment be published, and can transfer the funds abroad.

Retirement annuity members wanting to access their funds will need to financially emigrate before transferring the funds abroad. If not done before March 1 2021, they risk having their retirement fund tied up in SA for at least three years.

Provident preservation fund members will be granted access to their full benefit, which can be taken abroad. Pension preservation fund or retirement annuity members can access up to one-third of the capital, which can be taken abroad. Members wanting to access the full benefit will need to financially emigrate. On emigration, the benefit will be subject to a higher tax rate. If not done before March 1, they also risk having their retirement fund tied up in SA for at least three years.

The amendment will come into effect within the next four months. Those who have left their retirement funds in SA will need to evaluate the tax implications of expatriating their funds or retiring in rand. If you’re considering financial emigration, we recommend consulting an emigration specialist to finalise this process as soon as possible. The Treasury has stated that complete emigration applications submitted before March 1 will be finalised through the current process.

• Bezuidenhout is director and investment planner at Netto Invest. He was assisted in writing this column by Jason van der Westhuizen.

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