Changes are afoot which are likely to have a profound impact on your South African pension when you emigrate. Anthony Palmer, Group Commercial Director at Carrick Wealth, answers your most pressing questions on what to expect and what you need to do.
National Treasury is currently phasing out financial emigration for exchange control purposes. This raises issues around withdrawing pensions under the ‘three-year rule’. What do you need to know?
Clients have until 1 March 2021 to submit completed applications. For clients looking to emigrate they really need to push hard to meet this deadline. If they miss the deadline then they could suffer as they may very well need the funds to start their new lives abroad.
What is the three-year rule?
In terms of the Draft Taxation Laws Amendment Bill, which was published in July 2020, it is proposed that lump-sum withdrawals from retirement funds – which were previously permissible under the financial emigration rules – will only be possible when the South African tax resident has been a ‘non-tax resident’ for three years or longer. This effectively prevents the transfer offshore of retirement funds for a three-year period.
What is your view on these withdrawal changes?
The whole thing is quite illogical as the withdrawal is taxed, so why not just let people take out their retirement savings, pay their tax and move on with their lives? The South African Reserve Bank (SARB) keeps on talking about increased freedom of movement of funds and then implements this draconian act.
Taking the monumental step to emigrate can be a daunting and lengthy undertaking, what is the cardinal rule for success?
Emigration can be a long process which requires planning of between 6-18 months. On top of having to navigate the different citizenship and residency requirements of popular destinations such as Malta, Italy, Portugal, Greece or the UK, South African tax residents are faced with additional complexities based on the regulations in place here – notably the issue of financial emigration.
What is the difference between financial emigration and emigration?
Physically moving countries does not delink you from being a South African tax payer. That’s where financial emigration comes in. Going through this process enables you to terminate your South African Revenue Service (SARS) tax residency status and also terminates your SARB residency status for exchange control purposes. This means you effectively free yourself from residency requirements such as tax obligations. This is particularly important in light of the new ‘expat tax’.
What impact could the expat tax have on my emigration?
This change to the Income Tax Act came into effect early 2020 and effectively focuses on those citizens who have left South Africa to live abroad but haven’t notified the SARB. This means they are still classified as South African tax residents. Depending on your particular situation, financial emigration has, historically, been the most advantageous route available for avoiding potential income tax being levied by SARS on your foreign income. While this approach still enables you to access a South African inheritance or own local property, the mooted changes will now delay the withdrawal of retirement funds by three years.
Given these changes, what advice do you have for clients going through the emigration process?
Financial emigration is a complex process and one that necessitates carefully weighing up all the moving parts. The first thing to consider is that a pension is fully taxable when it comes out of the pension system, so the full tax implications need to be carefully considered. There are other options available to you, which should be discussed. For example if you are over the age of 55 you can retire with a living annuity and asset swap 100% of that, if you wanted, into hard-currency investments – which is great as part of a well-diversified portfolio. It is important to remember that you would effectively be cutting your South African pension by up to 36% by moving offshore, so take the time to undertake a careful financial assessment.
Palmer’s final advice on the subject is simple: “Seek professional advice and never make rash decisions.”