Access to South African retirement funds will become a factor of tax residency instead of exchange control residency.

TAKEAWAY: A client planning to emigrate from South Africa should cash-out their current pension fund if they want to access the funds within three years of leaving the country; if your client has been living abroad for more than three years already, then they may be eligible to cash out their retirement funds now. Keep this in mind when the client wants to add their pension funds to the trust fund.

What is changing?

One of the benefits for a South African to emigrate for exchange control purposes (often referred to as ‘financial emigration’), is access to their retirement funds.

Although a person can access 100% of their current pension fund upon the termination of employment, any previous pension funds held in a pension preservation fund or retirement annuities, are inaccessible until retirement age, or until formal exchange control emigration.

The recent taxation laws amendment bill proposes to do away with the exchange control emigration as a mechanism to get access to one’s retirement funds. Instead, the new requirement to access retirement funds will be that the person has ceased to be a South African tax resident, and has remained tax non-resident for at least three consecutive years.

There is a short window to still make use of the exchange control emigration route though:  if the exchange control emigration application is submitted before 28 February 2021 and approved before 28 February 2022, a person would be able to access his retirement funds.

What does this mean?

For many South Africans already living abroad, this will be a welcome relief, as they would possibly already be tax non-resident in South Africa. As a result of the amendment, they would be able to access their retirement funds as soon as they have been tax non-resident for three consecutive years after 28 February 2021.

For any South Africans planning to leave South Africa within the next year, this might be unwelcome news as, after 1 March 2021 they would need to wait three years to access any pension preservation fund or retirement annuity, unless they submit their exchange control emigration application before 28 February 2021. However, 100% of their current employer’s pension fund (as opposed to a pension preservation fund or retirement annuity), is available as a lump sum, and can be transferred abroad through the correct process.

The caveat? Tax. Even if tax non-resident in South Africa, a retirement lump sum withdrawal would be subject to tax in South Africa. In addition, a higher tax rate applies to withdrawals made before retirement age.

What do you need to know now?

Any person contemplating emigrating from South Africa in the future, may want to consider transferring his current pension fund to the new employer’s pension fund when moving between jobs, instead of transferring the pension fund to a preservation fund, in order to access the pension fund in full when leaving employment to emigrate.

For more information on South African tax and exchange control residency, read our briefing note here. For assistance in helping your clients plan their emigration, or transferring their retirement funds to the trust, contact us.

(UPDATED: 2 December 2020)