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What happens to your pension when you emigrate?
Planning to emigrate? Do you know about the 3-year tax residency requirement?
Emigration happens all over the world, but people tend to underestimate the challenges of the bureaucracy and administration involved when you move to a different country permanently. Emigration requires proper thought and serious research, as it is a life decision with significant financial consequences.
One important question is, ‘What happens to your retirement funds if you decide to give up your South African residency or citizenship?’
Formal emigration and the 3-year tax residency requirement
In March 2021 a ‘3-year rule’ came into effect. You are now allowed to receive your retirement benefits as a lump sum only when you meet both of the following conditions:
You are no longer a South African tax resident, according to the definition in the Income Tax Act.
You have maintained your status as a non-tax resident for a minimum of 3 years in a row.
The change helps South Africans by easing the process of moving their retirement investments out of the country, while still giving citizens some leeway to return home if they change their minds within those 3 years. It also acts as a buffer to prevent those who may be leaving the country for a short time (less than 3 years) from withdrawing their entire retirement savings. Financial experts do not recommend withdrawing your retirement funds early.
You will have to wait at least 3 years after you have left the country before you gain access to your nest egg
You should rely on expert financial advice when you decide to emigrate, to make the process of giving up your status as a South African tax resident easier. This process is often called financial emigration, and the South African Revenue Service (SARS) will issue a Tax Compliance Status (TCS) PIN when you have completed it.
Early access to your pension preservation and provident preservation fund
Before retirement, you will be allowed 1 withdrawal from your pension and/or provident preservation fund. If you have not made use of this withdrawal already, then you can do so without having to wait for the 3-year residency test. It is important to note that you will be taxed in accordance with the lump sum withdrawal tax table below.
Tax rates for lump-sum benefits
Taxable income from lump-sum benefits |
Rates of tax |
|---|---|
0% of taxable income |
|
18% of taxable income above R500 000 |
|
R36 000 + 27% of taxable income above R700 000 |
|
R130 500 + 36% of taxable income above R1 050 000 |
Ceasing to be a South African resident
According to SARS, ‘An individual, who is resident by virtue of the physical presence test, ceases to be a resident when that person is physically outside the republic for a continuous period of at least 330 full days. The individual will be deemed to have ceased to be a resident from the day such person left South Africa. An individual who has become a tax resident of another country through applying a double tax agreement will also cease to be a resident for tax purposes in South Africa.’
So, what happens to your retirement savings if you emigrate today?
In short, you will have to wait at least 3 years after you have left the country before you gain access to your nest egg. This applies to both retirement annuity funds and preservation funds (if you’ve already used your once-off withdrawal) – although you can still receive monthly income or annuities during that time, provided that SARS has issued your TCS PIN. Once you have reached the 3-year mark and are no longer a tax resident of South Africa, you are free to move any or all net proceeds out of the country, subject to the prescribed limits set in terms of the prevailing financial emigration policies.
Nedbank experts can help you manage financial emigration.
