My retirement annuity (RA) matures at age 55 which is on December 20 2021. I am emigrating before the end of the year and would like to be able to access the RA before the maturity date.
I have been advised there will be penalties associated with this. Could you advise what that would entail?
It seems that it could be prudent to stop the contributions now and gain access to the funds. The penalties and ongoing contributions (until December) would possibly offset each other. It would be much appreciated if you could shed some light.
Thank you for your question.
If I understand you correctly, you will be leaving the country permanently before December 2021, to live and work elsewhere. You have a retirement annuity, and you would like to cash it in before you turn 55, to take the funds with you. You do not state whether you have already completed the formal/financial emigration process with the South African Reserve Bank (Sarb). I will first deal with this portion of your question.
Before March 1 2021, you could not access your retirement annuity unless you were 55 years old, the fund value was less than R7 000, you became physically disabled, or you followed the formal/financial emigration process with the Sarb.
From March 1 2021 the Sarb financial/formal emigration process no longer exists, unless your application to the Reserve Bank was received on or before February 28 2021.
The law now states that anyone who wishes to access their retirement annuity may only do so if they have reached 55 years of age, the fund value is less than R15 000, they become permanently disabled or if they have been a non-resident for South African tax purposes for a period of three consecutive years on or after March 1 2021. If you were a non-resident for tax purposes from March 1 2018 to March 1 2021 you will already qualify to withdraw your retirement annuity early, as a lump sum.
This last part is an important change for people who are thinking of leaving the country or have already left the country.
If you want to access your retirement annuity, and the other provisions do not apply to you, you may no longer follow the formal/financial emigration process with the Reserve Bank, you must have been a non-resident for South African tax purposes, for a period of at least three years.
As an example, if you decide that you are going to leave South Africa and move to Australia on a permanent basis, you should in theory be able to break your South African tax residency the day you leave the country. You would then have to wait for three years after this date to be able to access your retirement annuity, at which point you would be able to liquidate the full value of the fund and be liable to pay the applicable withdrawal taxes.
In your case, if you had not already applied before or on February 28 2021 for the formal/financial emigration process with the Sarb, you would have to wait until you turn 55 to claim your retirement annuity. If the value of your retirement annuity is less than R247 500, you would be able to access the full amount, less any taxes that might be payable. If the value is above R247 500 then the one-third/two-thirds principle would apply, whereby you can withdraw one-third in cash after applicable taxes have been paid and invest the balance for a monthly income in some form of an annuity.
In summary of the above paragraph, if you have already reached the age of 55, the three year waiting period does not apply to you. At this point, however, you will be restricted to taking one third in cash subject to tax and two thirds would have to be invested in an annuity to provide a monthly income. If the amount available is less than R247 500, the full amount can be withdrawn subject to tax, if applicable.
If you have already completed the formal/financial process with the Sarb then you would be able to withdraw your retirement annuity before age 55.
Early withdrawal of your retirement annuity will be subject to tax at a much higher rate than if you made the withdrawal after retirement, while ceasing tax residency comes with a deemed capital gains tax liability.
You asked if it would be a good idea to stop your premiums so that you can offset any penalties that there might be for early retirement. The penalties would depend on whether your retirement annuity is an old type of retirement annuity or if you have converted it into a newer type of retirement annuity. The newest type of retirement annuities has a very small penalty for early retirement. I would rather advise you to continue with your premiums for as long as you can.
Please make sure that you contact a suitably qualified advisor who can serve you with expertise during this phase of your life. Good luck and all of the best to you in this new phase in your life.