29 Apr Financial Steps For Emigration and Immigration

Financial Steps For Emigration and Immigration

When people reach the point where they decide that they want to emigrate, they usually want to get everything wrapped up as soon as possible.

They choose a location, start scouting for jobs, homes and schools, and once choices have been made, they want to get the admin over and done. They sometimes inform schools and jobs that they will be leaving before matters have been finalised. But the admin can be a nightmare if you don’t know what you’re doing, or you may even experience some pushback from authorities in the new country – especially if you’re unprepared.

Let’s take a look at some of the financial steps you can take before you take on emigration.

Get your ducks in a row

While you may have your sights set on a particular destination, it’s crucial that you understand what the vetting criteria is for the particular visa you wish to apply for.

Sometimes the mere indication that you’ve done your homework could be the deciding factor for whether or not you’re granted entry. Many South Africans have found their immigration dreams dashed by authorities who see their callous approach to immigration as a sign of disregard for the culture, rules and authority of the lawmakers of the country.

Visa requirements

Different types of visa are subject to different rules. If you’re bargaining on snatching up a visa based on your income, investments or skills, it’s important that you seek to not merely meet those requirements but overshoot them where possible.

Local engagement: new destination

You’re far more likely to gain expedited entry to a country if you are already participating remotely.

Whether you are studying a course through a university or college in this country, part of a club or association based in this country, or rendering services to businesses or individuals based in this country – these are all positive indicators for your assimilation into their culture and activities.

Furthermore, since most of these activities carry a financial cost (study fees, membership and so forth), these also indicate that you are supporting the local economy. You don’t need to go to great lengths – a few small memberships or activities are suitable.

Financial activity: destination country

Building on the previous point, your chances of moving abroad are dramatically increased if you have a definite financial interest in the new location.

Bank accounts, stocks or other investments in the financial zone of the new country are highly beneficial for three reasons:

 – confirms that you’re already supporting the local economy
 – indicates that you have a trust and positive outlook on the economic environment of your new home
 – most probably an indication of compliance, since you will have traceable financial information

Financial activity: source country

While it’s easier for authorities to track and trace your financial activities within their own jurisdiction, the automatic exchange of information between OECD compliant nations (which includes most countries) makes it quite impossible to hide from authorities.

Make sure that your finances are completely above board. While it’s good to have bank accounts or investments in your new home, it’s also not advisable to have investments and accounts scattered the world over.

International financial activity may not be indicative of illicit activity, of course, but it could make the immigration process protracted as authorities need to track and confirm your activities. Although most nations are OECD compliant, some jurisdictions require significant motivation to release the financial information of foreign investors or account holders which could create significant delays.

Both SARS and tax authorities in your new home will require this information.

Trace all your assets

This may seem straight-forward for most, but if you’ve made use of broker services or have worked at numerous jobs over the years, there is a chance that you’re not aware of all your assets. 

As of April 2022, there is more than R47 billion in unclaimed pension benefits in South Africa. Additionally, many South Africans take out small investments or policies early in their careers and lose contact with the financial advisers or brokers who facilitated these services on their behalf.

You may assume that financial services providers should have you on their books and that information around your accounts or policies would be automatically shared with you, but this is not always the case.

There are many ways in which policies or clients can be ‘orphaned’ or neglected.

Broker/financial adviser realignment

Where a third-party broker facilitated the acquisition of a policy and managed the administration on the client’s behalf and then enters a new position or exits the sector entirely, the investments they managed aren’t always handed over with care.

They may also fail to communicate restructuring of funds or organisations where the client holds their policies or no longer sell policies or investments with a particular company. If the financial adviser hasn’t had any interactions with a client in a while, they may fail to touch base, believing that the financial services company where the policies are held will take over administrative duties and communication.

Changes to policy categories, regulations or fund types

Where a particular fund or policy is recategorised, ‘decommissioned’ subject to new regulations  or acquired by a different company through mergers, acquisitions or liquidations the handover or change of policy is not always smooth.

Where employees hold pensions or provident funds with particular organisations and subsequently leave the organisation, these funds cannot always be held by the same organisation or in the same type of fund when they leave. Since many South Africans are aware that they cannot encash certain funds (especially after previous withdrawals), they often neglect to instruct their former employers where they want the funds to be transferred – such as a pension preservation fund or retirement annuity.

Mergers, acquisitions, liquidations or organisational restructure

Although organisational changes definitely affect how funds and policies are categorised and managed, this does not simply scrap the value of assets or number of policies from the books.

Unfortunately, financial services companies don’t have a stock standard methodology across the industry in terms of how data is captured, maintained, recalled and shared. When two organisations merge or a holding company acquires a particular organisation, it could be quite the task to merge data warehouses and scrub the available data for accuracy.

While policies are linked to personal identification (such as ID or passport number), this is not efficient information for getting in touch with clients, especially where the organisation has never contacted the client personally (such as where policies were administered by external brokers), or where the organisation hasn’t been in touch with the client for quite some time.

Lack of sectoral transparency

Financial literacy is a prevalent issue in South Africa and frequent regulatory changes only compound the issue. Not only are many clients unaware of how such changes affect their financial assets, but financial services providers often use the ignorance of their clients as a retention tool.

By giving the client just enough information to understand the basics of the industry or their particular policies, the customer also remains beholden to the administering organisation to manage matters on their behalf. This is not necessarily a bad thing – there is a good reason to entrust your financial affairs to the capable hands of those who have expertise and are subject to regulatory oversight. But this lack of transparency and literacy makes it hard for South Africans to make informed choices about their finances, especially where certain changes (such as mentioned in previous points) arise.

Furthermore, tracking and tracing of orphan policies and unclaimed benefits isn’t that easy. While the tracking platforms offered by the Financial Services Conduct Authority (FSCA) does allow tracking of benefits – most people don’t have all the information required for this tracking, or their personal details may have changed several times over the years to the extent that they no longer know which contact details are valid.

FSP bias

This factor may not be as obvious as others, but it certainly does play a part. Financial services providers and investment houses focus their attention on acquiring and retaining high-end clients with significant income. This is logical – it’s the rationale for most business models.

The flaw in this model is that it doesn’t account for drastic changes in individuals’ financial affairs. Indeed, they do anticipate drastic negative changes as part of risk assessment, but the opposite is not necessarily true.

Many South Africans – especially those between the ages of 25 and 45 – experience rapid leaps from one income bracket to another as they excel in their careers. Furthermore, there are also those whose financial situation changes due to inheritances, settling debts (such as making final payments on cars financing, home financing or personal loans).

When brokers initially approach these clients, they tend to offer entry-level policies and investments. While certain brokers do catch up with their clients every now and then to check if their circumstances have changed, there is little incentive to touch base with clients who have long-term savings investments which grow incrementally over time.

Many such clients are therefore approached by different brokers over time and acquire various smaller policies scattered across the financial services landscape. These clients often forget about such smaller investments and don’t necessarily disclose such information to new financial services providers. Since funds or policies of a certain value cannot necessarily be encashed or transferred or where investments are locked in for a significant amount of time, these investments are often neglected or forgotten (leaving them orphaned when some of the previously mentioned changes arise).

Understanding rules for asset transfer

In line with the sectoral transparency, there is often much confusion over how different funds are categorised, which legislation applies and whether funds can be encashed at all.

Retirement funds

The general rule in South Africa is that retirement funds cannot be encashed before the age of 55. Historically the difference in treatment between annuities and pension funds (including provident and preservation funds) was quite distinct.

South Africans living abroad could, for instance, not transfer the proceeds of their retirement annuities and living annuities before the age of 55 unless they completed the process of financial emigration, while pension funds were not subject to the same restrictions.

Legislative changes no longer require financial emigration for the transfer of certain funds, nor are South African expats liable for exit tax, but the flipside of that coin is that emigrants are now required to keep their funds in South Africa for a period of three years post-emigration before it can be transferred abroad, and fund transfers are still restricted post-retirement for the most part.

There are six predominant types of retirement vehicles:

 – pension funds
 – provident funds
 – pension preservation funds
 – retirement annuities
 – living annuities
 – life annuities (guaranteed annuity)

Pension and provident funds were treated quite divergently in the past, but the treatment has been streamlined. A preservation fund differs from these types of investments in that the former are generally chosen by an employer, while the choice over which financial organisation manages the funds is generally up to the individual when they resign or are retrenched from a company.

Individuals are allowed one partial or full withdrawal from these funds before retirement age, though this is subject to taxation based on the value of the withdrawal and whether the funds are transferred to an annuity. Funds under R25 000 aren’t subject to withdrawal tax.

Retirement savings are subject to income tax once an individual starts drawing frequent income from these (which is only possible post-retirement) OR where an individual encashes part or all of their retirement fund (where allowed).

Life, living and retirement annuities are retirement vehicles which become ‘active’ after retirement only in that one can only draw an income from these after you’ve ceased working (and not before age 55). Retirement age in SA used to fall between the ages of 55 and 65, but the higher cap is determined sectoral as well as organisational rules.

Life annuities are a bit like insurance in that an individual is guaranteed an income triggered by an event (retirement) until death. They cannot be encashed or transferred, although you can include your family members in the annuity while you’re still alive. Life annuities can only be encashed after retirement age if the residual value (salvage value) drops below R75 000. Essentially this means that most individuals who have saved for retirement and acquired a life annuity won’t have access to the full amount.

Living annuities operate like investments and are therefore subject to similar risks as conventional investments. You can choose a drawdown rate between 2,5% and 17,5% per annum on a living annuity and there is the possibility of inheritance transfer depending on the drawdown rate and asset value. Living annuities can be acquired pre-retirement age, but they cannot be encashed before age 55. You are also prohibited from full encashment and transfer if the value exceeds R125 000, and such withdrawal is subject to taxation.

Retirement annuities can also be acquired before age 55, but cannot be encashed before retirement (unless the value is below R15 000). Should the value at retirement be less than R247 500 you can withdraw the full amount. Under previous legislation RAs could be withdrawn by completing financial emigration (subject to withdrawal tax), but this legislation no longer applies.

Changes in the near future

Note, however, that there are proposed legislative changes in the pipeline which aim to increase the withdrawal amounts and/or frequency of such withdrawals. This move seems a bit counterintuitive, since the lockdown of retirement funds was explicitly instituted several years ago to prohibit South Africans from exhausting their retirement savings before retirement.

Nevertheless, there is every likelihood that you may be able to access more of your funds before retirement age in future.  It’s a gamble though, since you would need to lockdown your retirement funds in SA for three years no matter the scenario.

Trusts and inheritance

Trusts and inheritance transfers are significantly more tricky since there are various factors which determine whether these funds can be transferred, how much can be transferred and how such monies are to be taxed and treated.

Trusts may require you to resign as trustee on withdrawal and the share of funds available will be subject to the individual rules of the trust. Inheritance income is subject to different sections of legislation, such as Income tax of the deceased, capital gains tax, estate duty tax and/or donations tax.

Proceeds from life insurance policies are viewed as assets (property) in terms of Section 3(3)(a) of the Estate Duty Act, but there are numerous exclusions or exceptions.

Get your tax affairs in order

The scrapping of exit tax and financial emigration requirements for South Africans makes it far easier to transfer the proceeds of your assets offshore. But this does not mean you can simply transfer funds abroad to your liking.

Tax Clearance is still a requirement for various reasons.

Proof of responsible financial management

Proof of compliance is a standard requirement for immigration in most instances and may also be a requirement when purchasing property or joining a foreign organisation. Foreign jurisdictions will want to determine that you manage your financial affairs above board.

Double taxation agreements

Secondly, while you are still a tax resident of South Africa you are subject to taxation on your worldwide income. In order to harness the benefits of a double taxation agreement, you will need to obtain tax clearance.

A double taxation agreement is an accord between two jurisdictions which prohibits the double taxation of a person’s income where they operate across two borders.

Foreign capital allowance

If you want to transfer amounts exceeding R10 million from South Africa for offshore investment, you will need to confirm your tax compliance.

SARS has different criteria for the type of foreign investment and the documentation required to gain tax clearance.

The purpose of the foreign investment or offshore transfer will determine whether SARS requires bank statements, trust financials, letters from executors, schedules of interest, details of listed securities, proof of financial sources, loan agreements, share portfolios and so forth.

Ceasing tax residency

Tax clearance is a requirement for ceasing tax residency with South Africa. Technically speaking, tax clearance is also the result of applying for change of tax residency status, but either way, your tax compliance would need to be determined for this to happen. 

Under former rules where South Africans needed to apply for financial emigration in order to transfer their financial assets abroad, tax clearance had to be obtained from SARS and submitted to the SARB. Since the SARB is no longer involved in this process, tax clearance is not necessarily a separate process but one which will have to be requested from and submitted (or verified) by SARS itself after the three year waiting period.

There are exceptions, such as for people who applied for financial emigration before March 2021 but whose affairs weren’t wrapped up before this date, but we won’t get into those details here.

Note: for Double Taxation and Foreign Capital allowances, tax clearance should be obtained every year. For other purposes tax compliance generally only needs to be confirmed once off.

Joint income & tax compliance

If you’re immigrating with a spouse and/or adult children or dependants, you will probably need to determine and prove the financial affairs and assets of your spouse/partner and adult dependants as well.

Many primary household ‘financiers’ (heads of household) neglect to enquire about the financial affairs of their household – whether debts, investments or policies. For the most part these affairs aren’t that significant, but some people are shocked to find that their family has evaded taxes, incurred debts or have small policies or investments held locally. It is a touchy subject, but be sure to check these details before formalising your emigration and immigration plans.

While your personal income may also be sufficient to immigrate as an individual, it may not be enough to satisfy authorities if several people are to immigrate since they will want to be assured that the group won’t become a financial burden once they’ve relocated.

Credit record

Many companies, countries or foreign financial institutions will require a clear credit record before they even consider you for appointment, immigration or as client. It’s prudent to assess your affairs and settle whatever outstanding debts you have before submitting any applications or taking on the process of immigration.

This may not always be possible, but assessing your entire financial portfolio may allow you to restructure your assets in a way which is most beneficial for immigration.

Trust the experts with your affairs

While Rand Rescue seeks to be transparent and educate all our clients about the ins and outs of cross-border finances, it is still a highly complex system to navigate.

Many individuals who try to manage these affairs on their own either lose out on tax relief, get held up with red tape or accidentally find themselves on the wrong side of the law by not following due process. What’s more, individuals don’t necessarily have access to tracking and tracing platforms accessible by financial providers.

Our initial consultation with you is free-of-charge, so it won’t cost you a cent to engage with us to determine your options, obligations and the best course of action for moving your financial assets abroad.

Simply leave your details below and we’ll get in touch with you!

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