Retirement Planning for British Expats in South Africa (Part 1)

Saving and preparing for retirement should be one of your main responsibilities throughout your working life. Leaving the UK to live and work in a different country does not make this responsibility go away. Indeed, it becomes even more important and typically also a bit more complex, as you are dealing with pension and tax systems in multiple countries.

Short Introduction to the South African Pension System

Due to obvious historical reasons the pension system in South Africa is similar to the UK in many ways, but you will also find significant differences. The system is based on three pillars:

  1. Public pension
  2. Contribution based pension schemes
  3. Other individual savings

South African Public Pension

If you are a permanent resident, you will officially be entitled to the public pension, which has a very generous retirement age of 60 and does not require you to have made any contributions (unlike National Insurance Contributions criteria for UK State Pension eligibility).

But don’t get too excited, because it is means-tested and the limits are relatively low, especially from the perspective of a higher paid expat. If your annual income exceeds 64,680 rand and you own assets worth more than 930,600 rand (or approximately double of that for a married couple), you won’t get anything. Anyway, with a maximum currently at 1,410 rand per month (1,430 rand if you are over 75) the public pension is too low to make a difference to a retired expat’s finances. You can find detailed official information about the public pension here.

Contribution Based Private Pension Plans

Like the UK, South Africa has a long history of employer-based pension plans and its pension fund sector is the biggest in Africa with an estimated $252bn in assets at the end of 2014. If you are employed in the formal sector, you will most likely be enrolled in an occupational pension scheme. There is no formal retirement age specified by law. Most companies use 65 years; some use 60 or 63. Defined contribution schemes are by far the most common.

Types of Retirement Funds and the Upcoming Pension Reform

At present there are three types of retirement funds:

  • Pension funds
  • Provident funds
  • Retirement annuity funds

They differ in several ways, including particularly the tax treatment of employer’s and employee’s contributions and flexibility at retirement. A comprehensive pension reform which is underway will eliminate most of these differences, with the objective of simplifying the system and motivating people to save more. The reform was previously intended to come into force on 1 March 2015, but has been postponed to 1 March 2016.

South African Pension Contributions

Under the new rules, pension contributions will be tax deductible up to 27.5% of your taxable income, but not more than 350,000 rand per year (contributions in excess of the limit can be rolled over to the next year). This will apply to the aggregate of all your retirement funds, including funds of all three types.

Under the existing legislation, effective only until 29 February 2016, the tax-free contribution allowances for pension funds are 20% for employer contributions and 7.5% for employee contributions. The same limit for employer contributions applies to provident funds, but employee contributions are subject to tax. With retirement annuity funds it is the opposite: no tax-free allowance for employer contributions and 15% of “non-pensionable income” for employee contributions.

In the second part we will look at taxation of lump sums and pension income and ways to make your retirement savings more flexible and tax efficient.