With the country’s increasing economic uncertainty, contemplated emigration is soaring as South Africans pursue fortuity abroad. In light of recent developments, we’ll consider some legal changes to emigration including the liquidation of certain retirement funding.

In tandem with phasing-out of “financial emigration” for exchange control purposes, as the 2020 Budget Speech enunciated, National Treasury emphasizes on SARS compliance for residents transferring funds out of the country. National Treasury in conjunction with SARS proposed amendments when construing “pension preservation fund”, “provident preservation fund” and “retirement annuity fund”. Income Tax Act’s section 1 provides for the payment of a lump sum benefit when a member withdraws from the fund due to them emigrating ‘permanently’. These regulatory amendments significantly affected how emigrating residents access retirement funds. 

Legal paradigms governing retirement funds have evolved replacing exchange control rules with tax verification processes, elemental to capital flow management systems, particularly when money is exiting the Republic. Previously, when cashing-out retirement annuity one underwent a financial emigration process which subsumed changing one’s residency status with the South African Reserve Bank (“SARB”). Additionally, access to retirement annuity was restricted to those aged 55 years, or where fund was under R7 000, or if they became permanently disabled or underwent the formal/financial emigration process. While formal SARB emigration is no longer possible, expatriates now complete the process of tax emigration through SARS.

From 1 March 2021, expats will need to complete the tax emigration process and maintain that position for at least 3years before encashing the retirement annuity and withdrawing it from the Republic. Tax emigration sees the status changing from resident to non-resident for tax purposes. Before commencing with the process, authorisation from SARS will need to be obtained, and SARS will only issue this if the tax status has been correctly updated to non-resident. The proposition results in a significant deferment in accessing retirement money and any early access to the retirement funds could attract punitive taxes- upto 36% can be levied on pre-retirement withdrawals. In times prior, people could move retirement savings offshore immediately after their financial emigration was processed.

Presently, anyone contemplating accessing their retirement annuity may only do so if they have reached 55 years of age, the fund value is under R15,000, they become permanently disabled or have been non-tax residents for three consecutive years on or after 1 March 2021. Importantly, people considering leaving or have already departed the country, wanting to access their retirement annuity may no longer follow the formal/financial emigration process with the SARB. They must have been non-resident for South African tax purposes for at least 3years and at which point they would be able to liquidate the full value of the fund and be liable to pay the applicable withdrawal taxes. Suffice to note that it never was a requirement that one had to financially/formally emigrate with the Reserve Bank in order to break South African tax residency.

If already 55years old, they can access their retirement annuity at any point and the 3year waiting period will not apply to them (although at this point, they will be restricted to taking one third of the value of the fund as a lump sum and the remainder will need to go into a living annuity).

However, many people are oblivious that if they have not already made one withdrawal from a preservation fund, no restrictions in accessing this fund will apply. Simply put, if you have a preservation fund and haven’t made withdrawals from the fund, you can access the full value of that fund at any point (but must pay the requisite tax) and there is no 3year waiting period as discussed above.  But, if you are still in South Africa and have a pension or provident fund with your employer, you will have full access to that fund when you terminate your employment and the 3year waiting period will not apply either.

Please note that the above is for information purposes only and does not constitute tax/financial advice. As everyone’s personal circumstances vary, we recommend they seek advice on the matter. While every effort is made to ensure accuracy, Nexia SAB&T does not accept responsibility for any inaccuracies or errors contained herein.

Article prepared by: Tinashe Chipatiso (Tax and Corporate Consultant)

For any queries, please contact:

  • Hassen Kajie (Entrepreneurial Business Services Director)
    M: (+27) 82 333 3389 | E: hassen@nexia-sabt.co.za
  • Yousuf Hassen (Entrepreneurial Business Services Director)
    M: (+27) 82 333 3376 | E: yhassen@nexia-sabt.co.za