South African retirement savings and their tax implications

The National Treasury and SARS recently implemented changes to South African retirement vehicles with the goal of motivating individuals to lay a strong foundation for their futures. This shift has come at an unfortunate cost, however; early withdrawals are now subject to taxes or penalties while regulations have become more strict. Despite this setback, we remain hopeful that these measures can make all the difference in providing secure retirements!

Understanding the retirement vehicle path set forth by National Treasury requires a journey through past quarters, as changes were regularly presented in this situation. Let’s explore how these modifications have developed over time and what it means for our future!

Previously, the three types of retirement funds (pension, provident, and retirement annuity funds) had different caps and deduction bases applied to them. In an effort to harmonise the tax treatment of these different types of funds, and with effect from 1 March 2016, the legislation was amended to allow for a 27.5% tax deduction, up to a maximum of R350 000 per annum, for all retirement fund contributions.

In March 2021, an amendment was enacted that required those retiring, to purchase an annuity with a portion of their pension or provident fund interest, to preserve the retirement funds. This further evidenced Treasury’s attempt to create uniformity among these retirement vehicles. However, there were still restrictions in terms of the annuities that could be acquired upon retirement.

For taxpayers who emigrate, a 3-year lock-in period on all retirement funds was introduced, before an expatriate could withdraw their retirement interests. Previously, individuals ceasing tax residency in South Africa (i.e., undergoing a residency cessation / financial emigration process) could withdraw their retirement funds, in full, upon the formalisation of their residency cessation. With effect from 1 March 2021, their retirement benefits were locked in for a minimum period of three years, after which they could be fully withdrawn (subject to lump sum tax implications). Simply put, one must have been non-resident for a minimum of 3 years, as confirmed by Sars, before they can qualify to withdraw their retirement interests in full.

The resultant requirements for withdrawing locked in Retirement benefits included the furnishing of a Tax Clearance Status (TCS) PIN, issued by Sars, to gain access to the funds and successfully withdraw. However, the PIN would expire after 12 months. Recently, and after the controversial Sars tax residency status “reset”, a Sars-issued Notice of Non-Resident Tax Status Letter has become an important requirement as well – this letter has no expiration date.

In March 2022, the Taxation Laws Amendment Act (TLAA), which introduced amendments to the tax laws in South Africa, increased the flexibility for a retiring member by expanding the types of annuities a member can purchase upon their retirement, thereby allowing the use of retirement interests to acquire annuities.

Further targeted at those ceasing tax residency, a proposal was suggested to implement a tax levy on retirement interests of individuals upon the cessation of their South African tax residency. After vehement opposition to this by industry stakeholders and the Expat Tax Petition group, this proposal was scrapped, which was confirmed with the promulgation of the TLAA.

South Africans faced substantial financial hardships due to limited access to their retirement funds, with difficulty repaying loans and leaving jobs on the line. The ultimate result was an alarming risk of jeopardised retirement security for many individuals in need.

Expatriates find themselves in a difficult financial situation when leaving South Africa, as the three-year lock-in period prevents them from accessing their funds to cover expenses associated with emigration. Even worse – they remain subject to taxation while living abroad indefinitely.

To ensure the wellbeing of individuals in their later years, a proposal was made to revolutionise retirement benefits. Aimed at striking an equilibrium between financial difficulty and creating savings for retirement, this revamp is open for public feedback.

In December 2021, the South African government unveiled an ambitious plan to enhance retirement security and reduce financial burden in households reliant on pension benefits. The policy proposal seeks to close the gap between limited savings provisions currently available and transform a notoriously unstable system into one that empowers its citizens with future-proofed stability.

Beginning 1 March 2023, Fund Administrators will introduce two exciting retirement pots: a ‘retirement pot’ and a ‘savings pot.’ To ensure all prior contributions are appropriately valued on 28 February 2023 to establish the vested rights of each individual, the Act requires new definitions under section1(1) of the Income Tax Act. In addition, access to withdrawals from your ‘savings pot’ is limited to once per 12-month period with no less than R2 000 being removed upon withdrawal – ensuring you get maximum value out of every penny saved!

The new two pot retirement system endeavours to create a uniform taxation scheme across the board, yet falls short in doing so. Vested assets will be taxed pre-March 2023 tax provisions and all withdrawals from the ‘savings pot’ included as part of an individual’s gross income taxed at their marginal rate. The retirement fund remains locked until reaching maturity where it is then assessed according to predetermined lump sum withdrawal tables for taxation purposes.

National Treasury’s effort to unify the retirement benefits landscape is praiseworthy. However, their two-pot system creates convoluted tax implications for policy withdrawals and should be revised accordingly.

For expatriates of South African residency, the requirements to release funds abroad have become more stringent with both a Notice of Non-Resident Tax Status Letter and a Tax Compliance Status (TCS) PIN now necessary. To successfully access these amounts, it is important that you are compliant with current regulations.

To ensure a streamlined and compliant retirement approach, consulting with tax experts remains essential even if the new proposition has been introduced. The intricate nature of retirement interests requires effective navigations for individuals to achieve their desired outcomes.