New Pension Rules Proposed for South Africans – Expats Beware

New Pension Rules Proposed for South Africans – Expats Beware

New Pension Rules Proposed for South Africans – Expats Beware

With all the ado of the past few months and many expedited regulations under lockdown, many proposed bills and rules may have fallen through the cracks of public scrutiny. Indeed, while ‘normal’ years would give us time to focus on proposals, amendments and ratifications of laws applicable to South Africans both locally and abroad, the same does not hold true for the past two years.

Pension shake-up for saffas

There are a few changes or proposed changes in the pipeline which South Africans need to be aware of. Rand Rescue takes a look at some of these.

Investing in Government infrastructure

Regulation 28 (in terms of section 36(1)(bB)) of the Pensions Funds Act determines where pooled retirement money may be invested and what percentages may be invested.

Currently this regulation limits pooled retirement investment in things like government infrastructure to 15%, but an amendment is underway which will raise this cap to 45%, with a 25% limit on investment in a single entity. Though the limit will be raised to 45%, an additional 10% will be allowed for investment in African infrastructure to bring the total exposure cap to 55%.

Though funds will not be forced to invest in these infrastructures as yet, and the proposal is therefore not strictly classified as prescription, there is every likelihood that the government will incentivise investment in their infrastructure.

Now, it should be noted that allowing for greater local infrastructure investment is not necessarily a bad thing and has been used by many governments to boost not only local investment, but the expediting of infrastructure development. Such investment has been remarkably successful elsewhere in the world, but it remains to be seen if such investment will pan out in South Africa.

One of the greatest concerns for South Africans is, of course, the persistent misappropriation of state funds and poor track record for infrastructure construction and maintenance. Not only has the state been compelled to bail out state owned enterprises time and again, but the corruption seems to be never ending. Consider also, the exorbitant costs of erecting vast interprovincial infrastructure projects like e-Toll which has simply been haemorrhaging rands from the state and public coffer. It is therefore no surprise that South Africans are wary to invest their hard-earned retirement savings in government infrastructure projects.

The government has already listed 300 infrastructure projects for which it requires investment following the limit adjustments, including roads, affordable housing, water provision and energy. The last is perhaps most concerning – for although South Africa is in desperate need of alternative energy sources, the energy generator has been wary to allow external access to the power grid. Many are concerned that the energy projects which have been shortlisted, or will be shortlisted in future, will merely funnel funds back into the struggling parastatal.

In addition to the adjusted limit on such investments from pooled pensions, hedge funds, private equity funds and other assets not referred to in the listed schedule will be delinked. These collective funds had been limited to 15% pooled investment to date. Following the delinking, private equity will be made an asset class on its own, with a proposed limit of 15% for the new class, while hedge funds and other funds not listed on the schedule will be limited to 10% and 2,5% respectively.

Power to the people?

In stark contrast to the previous point, a new bill has been introduced which would amend the current Pension Funds Act to allow South Africans to secure loans against their pensions.

This amendment is aimed at alleviating financial pressure for South Africans during an emergency. A major driver for the bill is the current Covid-19 crisis, with proponents for the bill arguing that the widespread personal financial crises in SA may have been curtailed had there been such avenues available to South Africans.

Many South Africans are, of course, quite elated at the idea of securing loans against their pensions for financial emergencies, but one has to wonder as to the overall reasoning behind the decision.

Over the last decade, the government has systematically locked down retirement savings in an effort to preserve savings for retirement. The key driver for this was the purported lack of financial competency and reckless squandering of monies intended for seeing saffas through their golden years. It has become increasingly difficult to take lump sums from such savings, and in some cases funds have been locked down indefinitely until retirement age. When government began introducing these measures, they’d also targeted other financial vehicles like debt. The rationale had been that too many South Africans are over indebted and that stricter measures should be in place to limit the extension of credit to those who cannot afford it.

Had the idea been for South Africans to take out loans from their pension purse itself and make repayments back to this purse, one may argue that the funds itself remain locked in the retirement vehicle. But instead, the rationale is to allow lending companies to offer guaranteed loans to South Africans against their pension funds, at competitive interest rates, with interest – of course –  going towards the lending company. Indeed, one may argue that it would be impractical and risky to allow loans directly from retirement savings, and such a system would be rather tricky to regulate. But is it not also counterintuitive to completely cut off access to retirement savings save for the purpose of incurring debt against such savings?

It seems rather circular that we’ve gone from restricted retirement fund access and credit to guaranteed loans backed by our savings.

More taxes for expats

In its 2021 Budget, the National Treasury published the latest Draft Tax Bill with several proposed tax amendments.

Within the Draft Taxation Laws Amendment Bill (TLAB) is an amendment which would drastically affect retirement fund access and treatment for South African expats. 

As it currently stands, South African emigrants already forfeit exit tax when severing their South African tax residency. The Income Tax Act stipulates that a person who ceases their tax residency in SA simultaneously disposes of their assets at market value which triggers this tax liability.

Such tax liability had no bearing on retirement fund interest to date. Perhaps interest had been negligible previously, but with the introduction of the Taxation Laws Amendment Bill applicable from March 2021, South African expats now need to retain their pensions in SA for a period of three years before they can expatriate the funds. This, of course, will see a drastic increase in interest-bearing retirement savings given that immediate access or transfer of such funds is no longer available.

In the past a natural person who ceases ordinary residence in SA was deemed to have ceased their residency from the day of exit, provided they had satisfied the ordinarily resident test. From March 2021, however, the cessation can only be actioned after three years with a retrospective view; the person ceases to be a resident on the day of leaving, but such termination is only applied retrospectively after three years. This makes the treatment of retirement monies rather complex. Should the person not satisfy the three-year cap which classifies them no longer South African for tax purposes, the treatment of their retirement savings will remain unchanged. Should they satisfy the three-year cap, they will now be deemed to have left SA formally three years prior.

The date conundrum

The problem comes in with the interpretation of the cession date. While the new rule essentially states that an individual’s tax residency may have ceased three years prior to withdrawal, the new dispensation only allows withdrawal of interest on such retirement savings after the three consecutive years of non-residency. The discrepancy between cession dates and allowed withdrawal dates is the issue in question.

While the tax treatment is essentially triggered when the individual ceases tax residency, it is only payable upon actual withdrawal. This places SARS in a tough spot, as it may be argued that they cede their rights to tax interest on the date of exit (retrospectively), which would not allow them to impose further taxes on retirement fund interest during the three-year period. Under a double taxation agreement, taxation of such interest could be deemed to be the sole right of the foreign jurisdiction which, of course, does not sit right with South African tax authorities. The amendment is therefore aimed at allowing the recovery of taxes on interest from retirement savings during this three-year period.

Some tax specialists argue that the measure is draconian since individuals will not have incurred this interests in the first place had their access to retirement savings not been restricted or forestalled by South African authorities. They put forth that such taxation is hypocritical, since a DTA would still have recovered tax on such interest for the period, and that the treasury’s aim to recover this tax for SA is foolish as they were the ones who have locked the funds down in SA in the first place. Additionally, what are the implications should an individual not satisfy the three-year rule within a strict three-consecutive-year period and perhaps only satisfy SARS and the SARB of their foreign tax residency in another year or two down the line. In such instance, will SARS deem the interim interest before the uninterrupted three-year period taxable locally, or will a DTA be used for such prorated period?

Another questionable stipulation is that this tax on interest be calculated according to lump sum tax tables prevailing at the time of payment. This makes sense given that one cannot simply impose a static interest on a variable amount in aggregate over time. Such a notion would be counterintuitive given that the initial amounts accrue in a linear fashion towards a future date. And yet, the source of the funds from which such interest accrues will have essentially ceased to fall within SA’s tax jurisdiction three years prior to the withdrawal of the interest.

Tax practitioners further argue that there is every likelihood that such funds which are locked down in South Africa for the three years or more in question will at least be partially utilised to fund government infrastructure projects such as those proposed in our previous point. They also question whether fund administrators and investment holdings may henceforth deem such funds as guaranteed financial assets should these investors or funds bear knowledge of the individual’s intention to emigrate from SA.

Other grey areas

Another rule imposed from March 2021 is that provident and provident preservation funds receive the same treatment as pensions, pension preservation funds and retirement annuities in that up to one third of the gross lump sum may be withdrawn as cash and the remaining two thirds be transferred into a pension or to purchase annuities. Should a South African expat therefore have taken their lump sum and transferred the remaining two thirds to a pension or annuity and subsequently be deemed to have retired from these funds three years prior, it may stir some confusion.

Greater clarity is needed to delineate the tax treatment on retirement funds for South African emigrants where a lump sum may have been applied or where the restriction may have necessitated a transfer of funds to an annuity or pension whose rules and interest differ vastly from that of the initial fund.

The matter is further complicated where individuals may have passed the 55-year retirement age limit within the three years (or possibly more) in question. The interpretation of retirement fund rules as well as individual fund rules may require closer scrutiny and deliberation.

Good news for some…

Good news for some saffas currently abroad is that the 3-year rule does not strictly apply from 1 March 2021 onward and can be imposed retroactively in certain circumstances. Should you have been outside SA before this date, you may well be able to access your funds provided you can prove that you’ve notified SARS and the SARB that you’re no longer a resident, can prove that you have spent an uninterrupted three years abroad, and can provide proof to your fund which satisfies their withdrawal criteria.

A residency certificate in the foreign jurisdiction would be required, which will trigger a tax directive application from your fund. Upon validation of the non-residency status and the directive from the fund, SARS can authorise the transfer of retirement savings, with the relevant taxes imposed on exit.

Need help to get your money out?

If you’ve already left SA, are planning to leave or need assistance to ensure you comply with the three-year rule, talk to Rand Rescue about your options.

We’ve helped thousands of South Africans living abroad to navigate the tricky waters of cross-border finance, and understand the ins- and outs- of local and foreign legislation and tax regulation.

Simply leave your details and let’s get the ball rolling.

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