What should you do with your South African pension if you move abroad?

Moving abroad can be an exciting new adventure, but it can also raise questions about your financial future. One of the biggest concerns for many people is what to do with their South African pension.

Generally, retirement funds only allow members to access their benefits in three instances; upon resignation or termination of employment, upon retirement or in the unfortunate event of death. For South Africans moving abroad, who are terminating employment the ability to access the capital in a pension becomes an option. But should this be done?

Know your situation

The decision to withdraw your South African pension should be made carefully and only after obtaining professional advice to avoid ending up paying avoidable taxes and reducing the hard-earned pension that is available to you. Your decision is likely to be dependent on whether you are emigrating permanently or if will you be returning to SA at a later stage.

‘If you are permanently emigrating, it would be best to optimize the permissible offshore allocation in your retirement fund portfolio to hedge against potential rand weakness when you withdraw from your retirement fund. If you intend to return to South Africa, it would best to preserve your retirement benefit which can be done through a preservation fund,’ says Samukelo Zwane, product head, FNB Wealth and Investments.

Cashing it in

This is probably the most appealing option, especially if you need to urgently cover moving expenses but it can result in a significant tax liability warns Louis Botha, senior associate in tax and exchange control, and Tshepiso Rasetlola, associate in employment law from Cliffe Dekker Hofmeyr in Cape Town.

‘If you are emigrating and under the retirement age of 54 years, you will be able to cash out your entire retirement fund benefits, but it will be subject to the relevant tax law. On the other hand, if you are over 55 years old and emigrating, you will be able to access a maximum of one-third of the fund benefits as a cash lump sum, which again will be subject to tax laws. The first R550,000 will be taxed at 0% although this limit is expected to increase to R550,000 as per the 2023 Budget. The remaining two-thirds must be used to purchase a living or life offshore annuity from a South African insurer,’ they explain.

Zwane also explains that to access your balance, you will also need to prove that you have been a non-resident for South African tax purposes for at least three consecutive years.

‘If you have a retirement annuity, you will need to prove that you have been a non-resident for South African tax purposes for at least three consecutive years to access your benefit. This requires you to inform SARS of your tax residence by submitting a declaration that you are ceasing being a South African tax resident. However, if you emigrated for exchange control purposes before 1 March 2021, you will not have to wait out the three-year period to withdraw the full pension amount,’ he says.

You will also need to apply for a tax compliance status letter from SARS if you are withdrawing and transferring more than R1 million, so you can use your foreign capital allowance (also known as the foreign investment allowance). If the amount is more than R10 million, you must obtain approval from the South African Reserve Bank.

Keeping it as is

If you choose to remain a South African tax resident whilst abroad, you will be able to contribute to your South African pension fund whilst abroad. The contribution will be deducted from your gross income earned in South Africa and abroad (worldwide income).

Monitor the law

Botha and Rasetlola warn that South Africa’s retirement regime will change significantly once the two-pot retirement system is implemented, which is intended to come into effect in 2024.

‘This would allow greater flexibility in terms of the amounts that can be withdrawn before retirement, although there will be tax consequences tied to this. If you are considering moving abroad in the next few years, and uncertain what to do with your pension, make sure to keep an eye on developments regarding these rules,’ they conclude.