Changes in the law concerning emigration and the liquidation of certain retirement funding

Estimated reading time: 5 minutes

From 1 March 2021 changes to the law that affect certain South Africans who have left or are thinking of leaving the country permanently came into force. These changes will affect people who have certain types of retirement funding, such as retirement annuities and preservation funds (with an important proviso to the preservation funds). This article will explain from a high level how the changes may affect you if you are thinking of leaving the country permanently or have already left.

The starting point in discussing the changes is to establish the law before the changes were made. Prior to 1 March 2021 you could not access your retirement annuity unless you were 55 years of age, the fund was worth less than R7 000, you became permanently disabled or you followed the formal/financial emigration process with the South African Reserve Bank. From 1 March 2021 the South African Reserve Bank financial/formal emigration process no longer exists (unless your application to the Reserve Bank was received on or before 28 February 2021).

The law now states that anyone who wishes to access his/her retirement annuity may only do so if you have reached 55 years of age, the fund value is less than R15,000, you become permanently disabled or if you have been a non-resident for South African tax purposes for a period of three consecutive years on or after 1 March 2021 (i.e. if you were a non-resident for tax purposes from 1 March 2018 to 1 March 2021 you will qualify). This last part is the important change for people who are thinking of leaving the country or have already left the country. If you want to access your retirement annuity (and the other provisos do not apply to you) you may no longer follow the formal/financial emigration process with the Reserve Bank; you must have been a non-resident for South African tax purposes for a period of at least three years. 

The first issue is, therefore, understanding what is meant by breaking your tax residency so that you can apply to access your retirement annuity after a three-year period. This area of our tax law is complex and each person’s circumstances need to be considered, but the general rule is that if you leave or have left South Africa permanently without the intention of coming back (or if you become “treaty resident” of a country with which South Africa has a double taxation agreement) you should be able to prove to SARS that you have broken your tax residency as you no longer consider South Africa your true home. Please note that it never was a requirement that you had to financially/formally emigrate with the Reserve Bank in order to break South African tax residency. 

As an example, if you decide that you are going to leave South Africa and move to the UK on a permanent basis you should in theory be able to break your South African tax residency the day you leave the country. You would then need to wait for three years after this date to be able to access your retirement annuity; at which point you would be able to liquidate the full value of the fund and be liable to pay the applicable withdrawal taxes. 

Please note that if you have already reached the age of 55 you can access your retirement annuity at any point and the above three year waiting period does not apply to you (although at this point you will be restricted to taking one third of the value of the fund as a lump sum and the remainder will need to go into a living annuity). 

The change in the law is also applicable to certain preservation funds.  A preservation fund is a retirement vehicle which contains funds from previous pension or provident funds i.e. if you leave an employer where you had a pension you have the option of putting the pension funds into a preservation fund. You do not make any further contributions to this fund, but it should hopefully grow over time with the investments that it holds. However, what a lot of people forget is that if you have not already made one withdrawal from a preservation fund there are no restrictions in accessing this fund. In other words, if you have a preservation fund but have not made a withdrawal from that fund, you can access the full value of that fund at any point (but must pay the requisite tax) and there is no three-year waiting period as discussed above. 

It is only if you have already made a withdrawal from a preservation fund that you must have broken your South African tax residency and have waited the three-year period, as discussed above, in order to access that fund. Alternatively, if you have reached the retirement date of your fund (each fund has its own rules and retirement date) you will also have access to your preservation fund subject to the one-third lump sum and two-third annuity restriction (with certain exceptions for provident preservation funds which fall outside the scope of this article).