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Emigration and retirement funds – conspiracy theory or fact?

Posted By Marilynh / March 8, 2021 / 2 Comments

In keeping with the times, there is now also a conspiracy theory around emigration and retirement funds.

Apparently, the government has imposed a three-year waiting period on emigrants’ retirement savings to stop them from leaving or, failing that, to take their money.

 

retirement savings 1200

 

 

The reality is far less sinister. Yes, the Government is introducing a waiting period, but it applies only in very specific circumstances. Even then, it can be avoided in some cases. Nor does it intend to make life more difficult for emigrants; it is merely a side-effect of dismantling our existing exchange control regime. In its place, we will have a cash-flow management system that does away with the concept of emigration and introduces a verification process based on tax residency. As before, such tax residency will be determined by the “ordinarily resident” and “physically present” tests as set out in
the Income Tax Act.

The change will be fully phased in by 1 March 2021. It does affect those leaving the country because “natural person emigrants” and “natural person residents” will from then on be treated identically. That’s a good thing.

Under the old emigration rules, people could either just pack up and go, using their annual capital allowance to move assets abroad, or they could go through the formal (and cumbersome) financial emigration process. The former meant leaving behind “restricted” retirement fund savings (see below) and still being considered a resident for tax purposes. Financial emigration resolved these issues but at the cost of a potential capital gains tax liability on assets left behind, and constraints on how they conducted
their local financial affairs in future.

These issues disappear with the new system. People can now become non-residents for tax purposes without having to pay capital gains tax on their remaining local assets. They can keep their local bank accounts and conduct their local financial affairs as before, and they don’t have to go through the Reserve Bank and Sars to do so. Also, they can still access their “restricted” retirement fund savings, albeit with a three-year delay.

To contextualise this statement, different access rules apply to pension and provident funds, preservation funds, and retirement annuity funds. As residents cannot access all their retirement savings before retirement, those same savings are also “restricted” for emigrants. More specifically, residents can withdraw their pension or provident fund savings before retirement, whenever they leave their employer. So can emigrants. On resigning, they can cash out, pay the lump sum withdrawal tax, and take the balance overseas (subject to their annual capital allowances).

Residents are also allowed one full or partial withdrawal from their pension and/or provident preservation fund before retirement, so this option also stays open for prospective emigrants. Importantly, this right of one withdrawal relates to every individual transfer to a preservation fund, and not to the fund as a whole.  What residents cannot do is access their retirement annuity fund (RA) or the balance of their
preservation fund(s) until they reach the minimum retirement age of 55. It is these “restricted” savings that are subject to the three-year waiting period.

Even this situation presents a potential loophole: where applicable, members can transfer their pension or provident preservation fund back to their current employer’s pension fund, or their provident preservation fund to their current employer’s provident fund.
They may do this even after having made their permitted withdrawals. This money then becomes available in the normal way, on resigning from their employer.

The retirement industry opposed the three-year waiting period on the grounds that it unfairly targeted retail savers, that many emigrants depend on this money to set up a new life overseas, and that it might disincentivise the use of RA and preservation funds.
Although these are valid points, National Treasury countered that it is not the government’s intention to incentivise emigration and that this waiting period is more equitable vis-a-vis residents who can only access these savings at retirement.

Underlying these arguments is a valid concern that the current system can be gamed. Given the more fluid modern living and work arrangements, some opportunists took advantage of the RA tax benefits and then deliberately avoided annuitisation through the financial emigration process, by establishing temporary tax residency elsewhere.

While that is not in the public interest, it is also not in the public interest to violate established savings principles. As it stands, emigrants’ savings remain subject to the investment limits of Regulation 28, which means they are over-exposed to local developments and the rand, whereas their retirement expenses will be incurred in another country in a different currency.

But we should not lose sight of the overall objective of the new regime, which is to modernise the capital flow oversight system in a way that balances the benefits and risks of all stakeholders.

Compared to the financial emigration process, the new system will be much more flexible and have a much lower compliance burden for those moving abroad. In that context, the three-year waiting period on very limited “restricted” retirement fund savings seems like a small price to pay.

Chris Eddy

 

 

Article by Chris Eddy, Head of Investments at 10X Investments

 

 

 

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Comments

2 Comments

  • Margaret o'Molony
    March 15, 2021 at 6:05 pm

    If I read this correctly my living Annuity still cannot be accessed because it is over the 1 million mark per year for foreign transactions. As a pension it should be available to me after my monthly draw down over and above my fox allowance. This RA money belongs to me. I should be able to access it and live on the monthly amount as intended even though I am living overseas now. Other retirement funds can be cashed in and taken overseas at age 65 I think
    I am 80yrs old and cannot access the funds intended by my husband to live on. Still very unfair.

    • Marilynh
      March 17, 2021 at 12:06 pm

      Dear Margaret,

      Thank you for your question. The truth is that none of the issues you have raised (eg your foreign exchange allowance) relate to the restrictions you face on your living annuity. That’s because your living annuity is not a retirement fund as defined by the Pension Funds Act, but rather an insurance policy of sorts.

      Our law does not permit either residents or emigrants to cash in their living annuity policy, except under very limited circumstances (when the balance drops below R125,000). The policy rules stipulate the maximum that may be withdrawn per year, which is 17,5% of the capital on the policy’s anniversary date. This does not change when you emigrate. Once you choose to transfer your RA to a living annuity, that money effectively becomes locked up in South Africa and you can only expatriate the income you receive annually.

      If you wish to hedge yourself against South African developments, the appropriate thing to do would be to invest the money in your living annuity in mainly non-South African assets, that are mainly dominated in the currency of your new home country. Your living annuity is not subject to the foreign exchange restrictions of Reg 28, so this is doable.

      Chris Eddy, Head of Investments at 10X Investments

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