Financial emigration and retirement funds

Financial emigration and retirement funds

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Article highlights

  • National Treasury has announced that the concept of “financial emigration” would be scrapped
  • Additional tests will be in place for retirees wanting to withdraw from their retirement savings
  • Retirees should stay informed of the regulations as clarity emerges

Earlier in the year National Treasury announced via the Budget that the concept of “financial emigration” would be scrapped.

A South African with the intention of formally emigrating has always had to apply to the South African Reserve Bank (SARB) but the intention was that the concept of “financial emigration” would be replaced by a more stringent test. This proposal was evident in the Taxation Laws Amendment Bill 2020 (TLAB).

What does this mean for retirement fund members?

Retirement fund members are generally only allowed to access their retirement fund benefits when they reach retirement age (55 for retirement annuity members and preservation fund members who have already taken their one withdrawal). However, the definition of a pension preservation fund, provident preservation fund and retirement annuity fund in the Income Tax Act allows a fund member to withdraw their full fund value prior to retirement if they “formally emigrate” from South Africa. Scrapping this requirement would require a new test for a retirement fund member to withdraw their retirement fund benefit when they “emigrate” from the country.

What is the proposed alternative test?

The explanatory memorandum of TLAB 2020 indicates that a new test should be inserted into the definition to make provision for the payment of a (retirement fund) lump sum benefit when a member ceases to be a South African tax resident and such member has remained non-tax resident for a period of at least three consecutive years.

How do these proposals affect retirement fund members?

Firstly, it is important to note that the above amendments are still just a proposal which if passed will become effective 1 March 2021. Members of preservation funds who leave the country thereafter will be entitled to take a full withdrawal as per preservation fund rules. Members of retirement annuities or preservation fund members who have already taken their one withdrawal will have to be non-resident for a period of 3 consecutive years prior to taking a full withdrawal. Alternatively, they can access their funds as per normal retirement fund rules at retirement.

What is not clear from the proposal is whether retirement fund members who have already “financially emigrated” prior to promulgation will be allowed to fully withdraw due to such emigration. Another concern is that “emigrating” members who require access to their retirement funds to settle into their “new life” will not be able to do so for a period of 3 years. 

Therefore, while there will likely still be some discussion around the detail, it is clear that the concept of financial emigration is changing and retirement fund members looking to emigrate from South Africa should make sure they are informed about what this will mean for their retirement savings. As always, your financial advisor and the team at Nedgroup Investments is available to assist with any queries in this regard.