I am currently working abroad and contribute to a pension fund. What would be the best thing to do when I return to SA? Should I leave the money in the overseas pension fund, or transfer it to SA? If I leave it overseas, how will I be taxed on it? I am already declaring the income to Sars.
Thank you for posing this very interesting question which is relevant to many Moneyweb readers in this modern and very fluid global business environment we find ourselves in.
As always when responding to these types of questions we must begin with the comment that without an in-depth consultation with you it is quite difficult to provide you with the correct and most appropriate advice.
In these matters, it is important for you or anybody else in this position to consult with an independent, licensed financial planner and in this case perhaps a joint consultation with a financial planner and a tax practitioner should be considered.
Now, let’s try and answer your question
You begin by saying that you are working abroad and that you are contributing to a pension fund, you then continue to ask that should you leave, if this capital should be left in the overseas pension fund or transfer it to South Africa?
It is quite difficult to provide an accurate response to you without knowing your age and in what jurisdiction you are working.
That said, our first instinct is always to advise that when a person changes their employer one should always consider moving their retirement capital (in the most tax-efficient way possible) out of their employer’s pension fund, as you would be constrained by the rules of that particular fund and some of these rules may not suit your requirements as an ex-employee.
Our second instinct is to try and leave the capital offshore invested in a global market currency, such as the US dollar, British pound or euro.
We have to remember that the rand has depreciated steadily over the last many years (I remember visiting the US in 1998 and the rand was at that time around R5 to the US dollar; we are now trading at over R14 to the US dollar) and by having capital invested offshore in foreign currency the investor will enjoy not only the benefit of being invested globally but in all probability be getting the added growth in investment value as the rand depreciates further against the hard currencies.
Lastly, in the global markets the sheer selection of investment options and funds that are available to the investor is much, much greater than those available to the investors who are solely focused on the South African investment product market.
However, it is also our experience that in many cases those investors who have benefits in pension funds domiciled outside of South Africa where they contributed to these pension funds when they were working abroad are often unhappy with their pension fund’s performance and the fees charged on the management of their benefits within this pension fund.
Personally, when consulting with clients who have offshore pension fund benefits, I often realise just how far ahead the South African investment and retirement planning industry is compared to our peers abroad. This is a moment when I am a proud South African.
Now in terms of the most tax-efficient way of transferring your pension benefits to a provider outside of your pension fund when you change your employer or when you retire, this would depend on where the pension fund is domiciled and which country you are working in.
You do state in your question that you have been declaring this income to the South African Revenue Service (Sars). You do not mention whether you are being taxed on this income in South Africa or not. This would have a material effect on how the capital in the pension fund would be viewed from a tax point of view.
We would recommend that you contact the pension fund administrator and determine whether the benefit can be transferred out of the pension fund when you retire/resign at some point in the future.
You should also determine whether you have an Additional Voluntary Contribution (AVC) because in many jurisdictions the capital value in the AVC you are able to transfer out of the fund tax-free at resignation/retirement.
If this is the case then I would recommend that this portion remain invested offshore outside of the pension fund structure when you leave your current employer.
For the balance in the pension fund, I would consider having it transferred to a Self-Invested Personal Pension (SIPP) if you are working in the United Kingdom. A SIPP is specifically designed for individuals who are resident outside the UK. A SIPP is a pension ‘wrapper’ that holds investments until the member retires and is ready to start drawing a retirement income. A SIPP is available to both UK and non-UK residents.
Again, I would urge you to discuss this matter with a qualified and independent financial planner who has access to expert tax specialists as both of these professionals need to understand cross-border retirement products, investment markets and the tax implications of your very particular situation.
Thank you for engaging with us. We hope this assists you in providing a solution to your investment portfolio planning requirements.