Encash your retirement savings before retirement
If you’re an expat living abroad, you’ve most probably considered your financial options — a favoured financial institution to serve as your local banker, an investment broker, a saving fund for your children or grandchildren and so forth. But when it comes to considering solutions of a more permanent nature, many global migrants are quite wary of big changes.
It’s understandable that cross-border finances would seem daunting for some, and one of the biggest stop signs in the financial emigration world is one phrase ‘blocked account’.
What is a blocked account?
The phrase ‘blocked account’ is not used as widely as it used to be a few years ago, since the Reserve Bank has changed the phrasing to ‘Capital Account’, but if you do online research, chances are you’ll stumble on articles mentioning a blocked account. Unfortunately, the regulatory bodies may not have known how daunting a ‘blocked account’ may sound, or perhaps it’s for this very reason that it was initially called such; in order to keep emigrants from making rash decisions.
The blocked, or capital account is a single account which is used to administer financial matters for South Africans who have financially emigrated. The ‘blocking’ was most probably used to refer to the fact that you won’t be able to conduct financial transactions via this account in the same way you used to manage your South African bank accounts. In fact, this account offers no electronic transacting capabilities, and instead of controlling it personally, someone will be assigned to manage it for you.
The account is generally only used by people who don’t plan on returning to South Africa, but there are cases where it could be beneficial to those who return as well.
The account is used to control asset transfers out of South Africa and can only be managed by an authorised dealer (generally one of the big banks in SA). All funds transferred through this account will need to be declared in the financial emigration application and once it is opened all your previous bank accounts will be closed. Bear in mind that you may still be able to open an account as a foreigner at a later stage, but once you’ve financially emigrated the process of investing and transferring funds to and from South Africa will differ.
Why would I want a blocked/capital account?
South African regulations stipulate that citizens are not allowed to encash their pension funds before the maturity (or retirement) date while they are still South African citizens for exchange control purposes.
This regulation was put in place to ensure that South Africans have funds available to them on retirement. Years ago, it was relatively easy to access retirement annuities, but the law changed to make it harder for South Africans to access any retirement funds before the minimal retirement age of 55, whether pension, provident and preservation fund or retirement annuities.
Though financial emigration does not affect one’s citizenry, it does change your status as financial resident. Once you’ve completed the purpose, you’re no longer considered a South African by the SARB and SARS. And, once you’re a financial non-resident, your financial assets are no longer governed by the same legislation as South Africans’.
This means that you are now free to encash your pension fund or other assets and transfer it offshore.
But isn’t it reckless to encash your pension?
For the most part it does seem like a silly idea to encash your hard-earned savings which you will need when you retire. But if you’re living in another country there are a few reasons why this makes sense:
- You can reinvest your pension in a local scheme which is more accessible to you
- You can receive financial rewards for investing your savings locally, such as the UK pension incentive scheme
- You could earn higher returns in a stronger currency
- Should you have another nest egg somewhere, you can always use the funds for another purpose without reinvesting it
Since you are no longer a South African resident for exchange control purposes, you will also not be liable for penalties on encashment. Though you will necessarily need to pay the customary withdrawal tax when encashing the funds, this amount could be negligible if you’re planning on retiring offshore or have a proper financial plan in place.
Why would you emigrate financially if you plan on returning?
If you plan on returning to South Africa for good in a year or two, this process would not be advisable. But should you want to return after a decade or two, you are free to reinvest your funds in South Africa on returning. What’s more, since you’ve already paid withdrawal tax on encashment, you will not be liable for further taxation on these funds.
What if I’m already retired?
Once your retirement fund has matured, you can use your blocked account to transfer this monthly or intermittent income offshore. Unfortunately you won’t be able to transfer the sum total of your retirement savings offshore at once.
What type of income can be transferred via a blocked bank account?
South African expats who have financially emigrated can use their blocked bank accounts to transfer:
• interest and profits
• cash bonuses on insurance policies
• rentals on fixed property
• income distributions from close corporations
• directors’ fees
• monthly pension fund payments (for registered pension funds only)
• close corporation membership fees
• income received from a trust created in terms of a last will and testament
• income received from an inter-vivos trust
• the difference between the purchase consideration and maturity value of quoted gilts.
Are you considering financial emigration?
Speak to Rand Rescue about your options. We can do a comprehensive assessment of your assets and the routes available for encashing and transferring your funds abroad. Our qualified team can assist you throughout the world and are trusted by thousands of South Africans to manage their cross-border finances.
Simply leave your details below and we’ll contact you for a free consultation.