In tune with the times, there is now a conspiracy theory around emigration and retirement funds. Apparently, the government has imposed a three-year waiting period on emigrants’ retirement savings to prevent them from leaving or, failing that, to take their money, writes Chris Eddy, investment manager at 10X Investments.
The reality is much less grim. Yes, the government is establishing a waiting period, but it only applies in very specific circumstances. Even then, it can be avoided in some cases. Neither does he intend to make life more difficult for emigrants; it is simply a side effect of the dismantling of our existing exchange control regime.
In its place, we will have a cash flow management system that removes the concept of emigration and introduces a verification process based on tax residency. As before, this tax residence will be determined by the criteria of “habitual resident” and “physical presence” as set out in the Income Tax Act.
The change will be fully implemented by March 1, 2021. It affects people leaving the country as “natural person emigrants” and “natural person residents” will now be treated in the same way. This is a good thing.
Under the old emigration rules, people could simply pack their bags and leave, using their annual capital allowance to move assets overseas, or they or they could go through the process of formal financial emigration (and heavy).
The former meant leaving behind the “restricted” retirement fund savings (see below) while still being considered a tax resident. Financial emigration has solved these problems, but at the cost of possible capital gains tax liability on stranded assets, and constraints on how they conduct their local financial affairs in the future.
These problems 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.
In addition, they can still access their “restricted” retirement savings, but with a three-year delay.
To contextualize this statement, different access rules apply to pension and provident funds, preservation funds and RA funds. As residents do not have access to all of their retirement savings before retirement, these same savings are also “restricted” for emigrants.
Specifically, residents can withdraw their pension or provident savings before retirement, whenever they leave their employer. The emigrants too. By resigning, they can cash in, pay the lump sum withdrawal tax and take the balance abroad (subject to their annual capital allocations).
Residents are also entitled to a full or partial withdrawal of their pension and / or their provident fund before retirement, so this option also remains open to potential emigrants.
It is important to note that this right of withdrawal applies to each individual transfer to a preservation fund, not the fund as a whole.
What residents cannot do is access their Retirement Annuity (RA) fund or the balance of their Preservation Fund (s) until they reach the minimum retirement age of 55 years. It is these “restricted” savings that are subject to the three-year waiting period.
Even this situation presents a potential loophole: if necessary, members can transfer their pension or provident fund to the pension fund of their current employer, or their provident fund to the provident fund of their current employer.
They can do this even after making the authorized withdrawals. This money then becomes available in the usual way, upon the resignation of their employer.
The retirement industry has opposed the three-year waiting period on the grounds that it unfairly targets retail savers, that many emigrants depend on this money to settle abroad, and that it could discourage the use of AR and preservation funds.
Although these are valid points, the National Treasury retorted that the government does not intend to encourage emigration and that this waiting period is more equitable to residents who cannot access these savings only in retirement.
Underlying these arguments is a valid concern that the current system can be played. Given the more fluid modern living and working conditions, some opportunists have taken advantage of the tax benefits of RA, and then deliberately avoided the annuity through the process of financial emigration, establishing temporary tax residency elsewhere.
While this 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 that they are overexposed to local developments and to the rand, while their retirement expenses will be incurred in another country, in a different currency.
But we must not lose sight of the overall objective of the new regime, which is to modernize the system for monitoring capital flows 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 lead to a much lower compliance burden for those moving abroad. In this context, the three-year waiting period on very limited “tight” pension fund savings seems like a small price to pay.
- By Chris Eddy, Head of Investments at 10X Investments
Read: Retreat and self-sabotage in South Africa