Last-minute retirement tax changes for South African expats
Tax experts have flagged tax changes for South African expats related to the two-pot retirement system, which have emerged in the latest proposals put out for public comment.
Proposed amendments to the Income Tax Act concerning the two-pot retirement system, were announced by Treasury on 1 August 2024, along with a host of other bills.
Experts at Tax Consulting SA said that these changes, coming just a month before the system’s scheduled implementation, have introduced a few last-minute considerations for South Africans living abroad.
The group noted that, under the current regime, only South African expatriates whose tax non-residency status has been confirmed by SARS for an uninterrupted period of three years, are able to withdraw their full retirement savings under the so-called ‘three-year lock-in’ rule.
The three-year lock-in rule operates independently of the general exceptions permitting early access to retirement funds, for instance, ceasing employment, it said.
However, in a significant reform to South Africa’s retirement savings landscape, the two-pot retirement system will enter into operation from 1 September 2024, which changes things up.
Under this system, retirement savings are divided into three (and not two) “pots”:
- The vested pot, consisting of all accumulated retirement savings as at 31 August 2024;
- The savings pot, consisting of one-third of retirement contributions, post 1 September 2024; and
- The retirement pot, consisting of two-thirds of retirement contributions, post 1 September 2024.
“Each pot is regulated by its own set of rules, which must be clearly understood by expatriates,” Tax Consulting said.
The most notable change in the proposed amendments is the clarification of the operation of the three-year lock-in rule, pertaining to the withdrawal of retirement funds by expatriates.
Vested Component
The vested component, made up of funds that a South African expatriate would have already accumulated up until 31 August 2024, is regulated under the current retirement regime.
This component will continue to operate under existing fund rules.
The proposed amendment, however, clarifies that the three-year lock-in rule will not apply to the vested pot of pension and provident funds.
Retirement Component
Although this is a new introduction to the retirement regime under the two-pot system, this component will also be subject to the SARS non-residency requirements.
Expatriates are therefore required to comply with the three-year lock-in rule, prior to being eligible to make an early withdrawal of the funds in the retirement pot.
Savings Component
Expatriates are eligible to make one withdrawal from their savings pot per tax year, which funds are not subject to the three-year lock-in period.
This is applicable to each separate retirement policy held by an expatriate. Where an expatriate has two policies, a withdrawal from each of the respective policies will be permitted in a tax year.
This is a favourable incentive for expatriates, as they do not need to comply with the three-year lock-up rule before being eligible to withdraw from a savings component.
Tax Consulting said that, in the rush to get ready for the implementation of the new two-pot retirement system, “it is clear that the ‘cease to be a resident’ requirements for early withdrawals from the retirement pot are here to stay”.
“Many expatriates had already begun planning their financial strategies based on the initial announcement of the two-pot system. The last-minute amendments necessitate a reassessment of these plans to ensure they align with the new rules, particularly the operation of the three-year lock-in period,” it said.
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