The High Stakes of South African Expat Retirement Planning - Cease Tax Residency

The High Stakes of South African Expat Retirement Planning

While planning and packing to move abroad may seem simple, many expatriates often wonder about what will happen to the fortune of their accumulated retirement funds. The questions on how to navigate the withdrawal of the different types of funds remain a difficult 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. Given recent legislative changes, understanding the intricacies of fund withdrawal has become paramount.

Mbalenhle Mahlaba Consultant: Expatriate Tax

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The essential requirement is to provide proof of non-tax resident status by obtaining a Notice of Non-Resident Tax Status Letter issued by SARS. This letter verifies the date when tax residency was ceased for the individual and is crucial for facilitating the withdrawal by the relevant policyholder. Failure to provide this letter often results in retirement funds remaining inaccessible in South Africa. Additionally, it is also a requirement for expatriates to apply and obtain an Approval International Transfer (AIT) TCS PIN to enable them to move the funds abroad.

The three-year lock-up rule

Previously, individuals could withdraw their retirement funds immediately upon confirming emigration status with the South African Reserve Bank (SARB) and South African Revenue Service (SARS). However, as of March 1, 2021, SARS introduced new regulations regarding Retirement Annuities for expatriates. According to the Tax Bill, expatriates can only access lumpsum benefits from their retirement funds if they cease to be South African tax residents and maintain this status for a minimum of three consecutive years. This three-year requirement means that expatriates must wait at least three years if they wish to make an early withdrawal. 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such as pension and provident funds are not subject to the three-year lock rule requirements, as these funds can be withdrawn after termination with the employer.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.

Opting to withdraw your South African retirement funds will result in various tax implications. These implications can vary, primarily depending on an expatriate’s personal situation and if there is any tax treaty between South Africa and new country of residency. Contributions borne in a South Africa retirement fund or pension fund are generally subject to being taxable in South Africa upon withdrawal, unless there is a tax treaty which may contain provisions regarding the treatment of tax on the respective pension and annuity funds, potentially providing relief from 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

The introduction of the two-pot retirement system was made known to the public in the latter part of 2023 and set to take effect on 1 September 2024, according to the Revenue Results Announcement by the Commissioner of SARS, Edward Kieswetter, made on 02 April 2024. This will bring about significant shifts and even more challenges for expatriates in how their current retirement savings are structured and managed. For expatriates seeking the withdrawal of their funds from South Africa, the position is still uncertain. At present, it seems that the “two-pot system” aims to divide retirement savings into two distinct parts. The first component of the two-pot system referred to as the “savings component”, which will be contained within the existing retirement fund will require members to contribute one third of the current retirement contributions into the saving component.  The second component of the two-pot system referred to as the “retirement component”, which will also be contained within the existing retirement, will require members to contribute two thirds of their total individual retirement funds into the retirement component.

Steering through the uncertainty

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. 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. It will always be prudent to seek guidance from experts.

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