Retirement annuities are tax-smart investments that help you to save for life after your nine-to-five. You generally can’t withdraw these funds before you turn 55, but you may be able to do so if you’ve emigrated from South Africa.

What is a retirement annuity?

A retirement annuity – or RA for short – is an investment vehicle designed to help people living and working in South Africa save towards retirement. It can be used as a standalone retirement investment or in addition to the pension or provident fund you may have through your employer.

As they were created to encourage people to build up a nest egg for retirement, these annuities have greater tax benefits than other types of investments. There are also regulations in place to ensure that they are managed correctly and that the investment risk is limited.

The Pension Funds Act, which governs retirement annuities in South Africa, sets out these rules as well as those that determine when you can access your retirement funds.

In general, you’re able to encash your retirement annuity only when you reach 55 – the legal retirement age in South Africa.

If your total investment at that point is worth R247,500 or less, you can withdraw the full amount. Where the value of your fund is R247,501 or more, you can only liquidate one-third (R82,500) of your retirement annuity. The remainder (R165,001) must be transferred to a living annuity that will pay you a regular income once you’ve finished working.

That said, if you’ve emigrated from South Africa and have no intention of returning, there’s little point to keeping your South African retirement annuity.

With this in mind, the South African government has passed regulations that allow for the withdrawal of your retirement annuity if you have left the country and have been tax emigrated for three or more years. 

Tax emigration and cashing out your retirement annuity

Before new regulations came into effect in March 2021, you needed to financially emigrate to withdraw your retirement annuity from South Africa.

The new regulations mean that South African expats no longer need to financially emigrate, but can rather tax emigrate. They also make the decision about tax residency a function of the tax authority, the South African Revenue Service (SARS).

How does tax emigration from South Africa work?

It may sound intimidating, but tax emigration is simply the process of proving to SARS that you aren’t a resident for tax purposes and don’t need to pay South African income tax on foreign earnings.

A straightforward residency test is used to determine whether you’re able to transfer your retirement annuities out of South Africa.

Also known as the three-year rule, the test requires that those who emigrate show that they’ve been living, working and paying tax in another country for at least three years before they may withdraw their retirement savings from South Africa.

You will need to show that you don’t meet the requirements of either the physical presence or ordinary residence tax residency tests for SARS to acknowledge that you’re no longer a tax resident.

• Physical presence test: You have spent less than 91 days in South Africa for the current assessment year as well as the preceding five years of assessment, with less than 915 days in total during those five preceding years.
• Ordinary residence test: Where your permanent home, family and other assets are located, as well as whether you have dual residency, are paying tax in the country of your second residency and whether a double-taxation agreement exists between South Africa and that country. 

The three-year rule was devised to help emigrants easily show SARS that their intention to leave South Africa is substantiated and permanent. In other words, that you aren’t just emigrating to gain access to your retirement investment.

It’s good to know that this rule is retrospective. This means that you don’t need to wait three years from March 2021 to be able to tax emigrate. If the three-year anniversary of your foreign tax residency comes up any time after this date, you can apply to liquidate your retirement annuity.

Note: If you had financially emigrated under the old SARB rules and hadn’t encashed your retirement annuity by 28 February 2022, you will need to follow the new tax emigration rules to withdraw your investment from South Africa. These emigrants will need to have been resident in another country for three years before being able to cash out their retirement annuities. 

8 steps to withdrawing your retirement annuity from South Africa

Although the three-year rule has made it easier for SARS to determine whether you’re a South African resident for tax purposes – and, therefore, whether you can liquidate your retirement annuity – the process of moving your investment offshore can be tricky.

You’ll need to follow the eight steps below to move your retirement annuity out of South Africa:

1. Notify SARS

The first step in the tax emigration process is relatively simple. You need to notify SARS of your non-resident status in the year that you stop being a South African resident for tax purposes (i.e. the last year that you pay income tax in the country).

This is usually done when you submit your tax return, but you can also tender a manual submission if you weren’t aware that you’d be emigrating when you submitted.

2. Calculate your deemed capital gains tax

If you have assets in places other than South Africa, for example offshore properties or share portfolios, you will need to pay “exit tax” (a type of capital gains tax) on the value of those assets on the day before you stopped being a resident.

3. Submit to an audit by SARS

Unfortunately, SARS won’t just take your word for it that you’re no longer a resident. In some cases, the tax authority’s auditors may do a manual intervention to assess your submissions before approving your non-residency status.

4. Apply for emigration tax clearance status

To get tax clearance status (TCS), you’ll need to prove that your tax affairs are in order. Plus, you’ll have to verify the source of the funds that you want to transfer before they can be wired overseas.

5. Follow the three-year rule

This part is simple. You need to live, work and pay tax in a country other than South Africa for three consecutive years. If you’ve already been a non-resident for tax purposes for three years, you can immediately apply to withdraw your retirement annuity.

6. Submit your retirement annuity withdrawal request

Once you’ve been outside of South Africa for three years and your tax emigration status is approved, you can submit the withdrawal request to the company that manages your retirement annuity.

7. Wait for SARS’ tax directive

Retirement annuities are taxed when you liquidate them. The company that manages your retirement annuity needs a directive from SARS that confirms your status as a non-resident and outlines the amount of tax that needs to be deducted before it can pay the balance out to you. This step may take a while to be finalised.

8. Withdraw your funds

All paperwork submitted to and approval given by SARS, you’ll receive your funds and can transfer them wherever you wish.