It’s been two years since the three-year rule was introduced into South African tax law, and there’s still a surprising amount of misinformation and confusion about the concept and how it applies to your retirement annuity (RA) savings once you have emigrated from South Africa. Let’s clear up three of the most common misconceptions about withdrawing your retirement annuities post emigration:
- It means you must wait three years before you can surrender your RA and only then can you complete tax emigration.
- It means there is a three-year lock-in/waiting period applied to all retirement savings in South Africa.
- It means you must wait three years after you have completed tax emigration before you can access your retirement savings.
All of these are incorrect. And we’ll explain exactly why in a minute. First, we need to clarify what three-year rule we’re talking about here.
What is the three-year rule on RA withdrawals?
When formal emigration through the South African Reserve Bank (SARB) was phased out effective 1 March 2021, it was replaced with the process of tax emigration through the South African Revenue Service (SARS). This meant a change in the trigger event for RA withdrawals. Where the trigger event for early retirement annuity withdrawal used to be changing your status from resident to non-resident from an exchange control perspective (SARB) it is now triggered by changing your status to non-resident from a tax perspective (SARS).
- Tax emigration vs formal emigration: the facts
- In case you missed it: financially emigrated doesn’t mean tax emigrated
As such, in order to be eligible to withdraw your retirement annuity savings, you must have permanently relocated from South Africa (with no intention to return) and ceased tax residence with SARS. Once you have received your emigration Tax Compliance Status (TCS) PIN from SARS, this is confirmation that you have completed tax emigration and are now considered a non-resident for tax purposes. Okay. So back to clearing up those misconceptions about the three-year rule…
Misconception #1: You must wait three years before you can surrender your Retirement Annuity and only then complete tax emigration to change your tax residence status in South Africa.
Here, the order of events is somewhat mixed up. You will need to complete tax emigration first, but once it’s done, you can cash in (surrender) your retirement annuity in full at any time, even before the age of 55 as long as you can show you have been a tax non-resident for three years. How do you become a non-resident for tax purposes? Through tax emigration, of course. Individuals must be able to show SARS that they no longer meet the requirements for tax residence in South Africa.
- The new SARS procedure on how to become a tax non-resident of South Africa
- Breaking tax residency with South Africa: what you need to know about the SARS Declaration of Cease to be a Tax Resident
- Blessings from SARS – updates to withdrawals from retirement annuity funds after emigration.
Misconception #2: The three-year rule applies to all retirement funds.
Despite the fact that the rule makes reference to retirement funds, it is only preservation funds and retirement annuities (RAs) that are actually affected. We repeat. This three-year rule applies to retirement annuity and preservation funds only – it does not apply to pension funds. In terms of preservation funds and provident preservation funds, even if you have utilised your one pre-retirement right of withdrawal, you may still withdraw the remainder in full (less penalties and lump sum tax to SARS) after being non-resident for three years.
Misconception #3: The three-year period starts only once you have completed tax emigration.
Great news. If you left South Africa more than three years ago, your tax emigration can be backdated to the date that you departed and you can access your RA immediately after ceasing tax residency. How is this possible? According to the physical presence test that SARS uses, you cease to be a tax resident if 330 days have passed since you left the country and you have no intention of returning to South Africa. After 330 days you are then considered to have ceased your tax residency on the day that you left South Africa permanently. As such, all you need to do is count three years from your date of physical relocation in order to ascertain when you are eligible to cash in your South African RA . Thereafter you must follow your specific RA fund rules for notifying the administrator of your intention to withdraw. The fund administrator then submits a tax directive request, which enables SARS to instruct the fund administrator or insurer on how to deduct tax from the lump sum cash payout. Until earlier this year, the tax directive system included a validation that resulted in applications being rejected, where the reason noted was ‘emigration withdrawal’ and the associated date was on or after 1 March 2022. This tax directive validation has since been removed, making it possible to backdate your emigration for the purposes of withdrawing your retirement annuity without having to start the clock on the three-year lock-in, all over again.
FinGlobal: retirement annuity encashment specialists
We have already helped thousands of South Africans to withdraw their retirement annuities after emigration. In fact, we have assisted on more than 33 618 policy surrenders to date, and we are ready to help you with yours. From tax emigration through to transferring the proceeds abroad, we’ll make it hassle-free, stress-free and easy, every step of the way. Please request a free financial report so we can advise you on your options. Leave your contact details below and we’ll be in touch.
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