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Nobody is trying to steal emigrants’ retirement savings

Changes to the rules for emigrants from SA about when they can access savings that would usually remain tied up in their retirement fund attracted familiar complaints from the usual suspects. ‘Not fair!’, ‘The ANC is trying to steal our money!’ and etc.

But those who are willing to see it will know that the rule changes modernise the treatment of those who emigrate and those who don’t in a world where everybody is a lot more mobile. They also bring treatment of emigrants into line with those who choose to stay.

Chris Eddy, Head of Investments at 10X

Don’t believe me? Read what Chris Eddy, Head of Investments at 10X Investments, has to say:

In keeping with the times, there is now also a conspiracy theory around emigration and retirement funds. Apparently, Government has imposed a three-year waiting period on emigrants’ retirement savings to stop them leaving or, failing that, to take their money. But 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 was 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 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, to preservation funds, and to RA 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 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.

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