Pensions changes in South Africa – emigrants beware

South African expats have been warned about the possible consequences of the new two-pot retirement system.

Despite many commenting on the possible upside of the new system for South African residents, Micaela Paschini and Khutso Makgoka from Tax Consulting SA said that there are still concerns about the possible effects that the new system will have on expats who have ended their tax residency in South Africa.

“Expats have faced several challenges with encashing their retirement funds, from the introduction of the three-year lock-in rule to the knotty requirements faced with policy providers,” the experts said.

“The spring from which the encashment of an expat’s retirement funds flow is the formalisation of their cessation of tax residency. “

“While previously, this may have been a simple process which the South African Reserve Bank allowed immediate encashment upon formalisation of non-resident tax status, recently, it has been transformed into a far more rigorous exercise.”

Expats need a “Notice of Non-Resident Status” letter from SARS, and the Approval International Transfer Tax Compliance Status must also be followed process as it allows the payment of encashed retirement funds.

Despite the more intricate system, the experts said the tax implications for enchasing retirement funds have always been simple. In straightforward terms, the relevant tax table applied to the tax calculation was selected by the type of encashment.

However, the new retirement fund encashment dispensation will create more obstacles for those navigating their policy encashments.

The new system

Under the new tax system, there will be a retirement savings pot where a maximum of one-third of all retirement savings can be placed. These savings will be accessible once per year before retirement and are aimed at helping South Africans during periods of distress, such as the Covid-19 pandemic.

There will also be a retirement pot, which will store a minimum of two-thirds of all pension contributions and will only be accessible on retirement.

A third vested pot will contain all savings from before the implementation of the two-pot system on 1 March 2024 and will follow existing legislation. The Vested Pot will, thus, still be subject to the three-year lock-in period.

“For expats, the two-pot system may require the categorisation of each pot to be taxed separately in accordance with their differing values,” the experts said.

“With no firm direction from SARS, expats may need to prepare for the tax implications on each of their savings, retirement and vested components once they have ceased to be tax residents and should they seek to encash their benefits thereafter.”

“Although still in its early stages, the two-pot system threatens additional complexities for those ceasing their tax residency and intending to encash their retirement funds. Whether the National Treasury and SARS intend to create uniformity with the encashment of expat retirement funds is yet to be determined.”

Read: Big turn for South Africans earning more than R20,000 a month