Breaking SA tax residency – navigating the two-pot maze

South Africans leaving the country have many financial aspects to consider – key among these is what to do with their retirement fund benefits. With the introduction of the two-pot regime on 1 September 2024, this area has become even more complex. In this article, we set out the retirement fund withdrawal options available to members who have ceased/intend to cease tax residency in South Africa. As different rules apply to the different components, we will examine the components separately.

Withdrawals from the Savings component and Retirement component for all retirement funds¹

Savings component:

Members can withdraw from the Savings component at any time, provided they made no withdrawal from the Savings component of the contract in that tax year. Therefore, members are not required to wait until they have been non-SA resident for a period of 3 years. Withdrawals from the Savings component are taxed in accordance with the member’s marginal tax rate. If the member has already received a savings withdrawal benefit during that tax year, they would merely have to wait until 1 March of the following year.

Tip: The member’s marginal tax rate in South Africa may be lower after having left SA. Therefore, from a tax perspective, it may be preferable to wait before accessing the money in the Savings component – if South Africa has the taxing rights in terms of the applicable Double Taxation Agreement.

Withdrawal options when ceasing tax residency

Source: Ninety One.

Alternatively, the member may transfer the benefits in the Savings component to the Retirement component and wait until they have been non-resident for 3 years to withdraw. Such a withdrawal would then be taxed in terms of the withdrawal tax table.

Please note: The member’s age does not determine the tax table that applies to retirement fund lump sums – the type of lump sum (i.e. withdrawal, retirement lump sum or death benefit) determines the tax table. Therefore, if the member has instructed a 3-year non-resident withdrawal, the withdrawal tax table will apply, even if the member is over the age of 55. If the member chooses to rather retire from the fund, the retirement tax table will be applied to the lump sum, but they may be restricted in terms of the maximum lump sum they are permitted to take.

Retirement component

The standard rule is that benefits in this component must be preserved until the member retires from the fund, and at retirement, the full benefits must be used to purchase a compulsory annuity.² However, if the member has been a non-resident of South Africa for a continuous period of at least 3 years, they will be permitted to withdraw from this component. The withdrawal would be taxed in accordance with the withdrawal tax table.

Exceptions: If a member is at the fund’s retirement age, and the value of the benefits in the Retirement component, plus two-thirds of benefits in the Vested component (excluding any provident fund vested benefits), is less than R165 000, they will be permitted to retire from the fund and receive the full benefit as a lump sum. This is referred to as the “de minimus rule”. The retirement lump sum will be taxed in accordance with the retirement tax table, providing a possible amount of R550 000 tax free (if not yet utilised).

Withdrawal rules the same as in the pre-two-pot regime

Vested component

Members’ retirement fund benefits before 1 September 2024 Legislation prior to two-pot system continues to apply

The options for withdrawals from the Vested component will differ – depending on the type of retirement fund

Vested component of pension and provident funds

These benefits are available to withdraw on resignation from employment (taxed in terms of the withdrawal tax table). Therefore, the member will not have to wait until they have been a non-SA resident for 3 years. Alternatively, the member is also permitted to transfer these benefits to a preservation fund or retirement annuity fund. If the member chooses to transfer the benefits in the Vested component, the other two components must be transferred at the same time to the new fund. (Components must be transferred together from one fund to another.)

Benefits in the Vested component may also be transferred to the Retirement component.

Vested component of pension preservation and provident preservation funds

If the member still has the option to take a once-off withdrawal, they may take such a withdrawal even if they have ceased to be tax resident. This option is available immediately and therefore the member would not have to wait until they have been out of SA for 3 years. The South African Revenue Service (SARS) does not require any supporting documentation for the directive application of a once-off withdrawal, as it does with non-residency withdrawals. The withdrawal will be taxed according to the withdrawal tax table.

Please note that if the once-off withdrawal option has already been exercised, the member will have to wait until they have been non-resident for 3 years. A withdrawal after ceasing to be tax resident is also taxed in terms of the withdrawal tax table.

Vested component of retirement annuity funds

The benefits in the Vested component of a retirement annuity fund may not be accessed before the member reaches retirement age unless the member has been non-SA tax resident for a period of 3 years. The withdrawal will be taxed in terms of the withdrawal tax table.

What supporting documents does SARS require when applying for a tax directive (cessation of SA residence)?

When applying for a SARS tax directive, the administrator is required to upload the following supporting documents:

• Certificate of residence from the Tax Authority of the member’s new country of residence (not older than 12 months)
• An ‘Update Tax Residency Status’ notice from SARS, if received
• Documentation confirming cessation of residence, for example:
  • a copy of the member’s passport and a travel diary, indicating reasons for visits to SA, and/or
  • assessments issued by the new country of residence

The member must have informed SARS that they ceased to be a South African tax resident. If they did not inform SARS previously, they will first have to complete the Registration Amendment and Verification Form (RAV01) on eFiling.

SARS will reject tax directives if the correct supporting documents were not attached to the application, or if the member did not inform SARS that they ceased to be tax resident.

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¹ Rules that apply to pension funds, provident funds, pension preservation funds, provident preservation funds and retirement annuity funds.

² Unless the de minimus rule applies.