Pension problem for South African emigrants

 ·26 May 2024

Older expatriates often wonder what will happen with their retirement savings, and the new Two-Pot retirement system is leading to more significant confusion among South African savers.

According to Mbalenhle Mahlaba from Tax Consulting SA, moving funds abroad remains a complex and confusing topic.

“As more expatriates plan to retire abroad without intentions of returning, it’s clear that many South African expatriates are still grappling with this issue,” said Mahlaba.

An essential requirement is proof of non-tax resident status through a Notice of Non-Resident Tax Status Letter issued by SARS, which verifies the date when the tax residency ceased for the individual and is crucial for facilitating a withdrawal of funds.

Not having this letter will often result in retirement funds remaining inaccessible in South Africa.

Expats will also need to apply for an Approval International Transfer (AIT) TCS PIN to move the funds abroad.

The three-year lock-up rule

In the past, expats could withdraw their retirement funds immediately after confirming emigration with the South African Reserve Bank (SARB) and South African Revenue Service (SARS).

In March 2021, SARS introduced new regulations concerning Retirement Annuities for expatriates. The Tax Bill stated that expats can only access lumpsum benefits from their retirement funds if they cease their South African tax residency and keep this status for a minimum of three straight years.

“This three-year requirement means that expatriates must wait at least three years if they wish to make an early withdrawal,” said Mahlaba.

“It is important to highlight that the three-year rule is only subject to retirement annuities and preservations funds. Other retirement funds such as pension and provident funds are not subject to the three-year lock rule requirements, as these funds can be withdrawn after termination with the employer.”

Tax implications on withdrawal of retirement funds.

Withdrawing South African retirement funds will result in several tax implications, which will vary depending on the expat’s personal situation and whether there is a tax treaty between South Africa and the new country of residency.

Contributions borne from a South African retirement fund or pension fund are generally subject to being taxable in South Africa upon withdrawal, except if there is a tax treaty which contains provisions for the treatment of tax for pension and annuity funds, potentially stopping any double taxation.

“The timing of these fund withdrawals can also play a significant role in how the funds will be taxed, as SARS may impose penalties or additional taxes may be imposed on the early withdrawals.”

Two-pot retirement system

South Africa will soon have a new two-pot retirement system.

The new system will see a third of all retirement savings from implementation go into a “Savings” pot, which will be accessible upon retirement. A “Retirement,” on the other hand, will house the remaining two-thirds and only be accessible upon retirement.

The new system still raises questions for expats looking to access their retirement savings.

“The impact of the “two-pot system” on expatriates and associated tax implications remains unclear. The division into two pots may affect the investment opportunities available to expatriates as different regulations may apply to each pot,” said Mahlaba.

“Expatriates uncertain about their tax situation may encounter difficulty when withdrawing retirement funds. A clear and straightforward approach is essential to assist individuals in obtaining necessary proof and facilitate seamless remittance offshore.”

Read: It will be different this time: Ramaphosa promises NHI won’t be looted like the R500 billion Covid fund

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