Retirement Planning for British Expats in South Africa (Part 2)

In the previous post we have explained the basics of the South African pension system. We have looked at the tax-free pension contribution allowance and the upcoming pension reform. Now we will look at lump sums and retirement income, applicable rules and, most importantly, taxation, which unfortunately can change the numbers in a significant way.

Lump Sum and Annuity Rules

Up to one third of the pension’s amount can be taken out as a lump sum. At least two thirds must be used to purchase a compulsory annuity, except when the total pension’s value is below 75,000 rand. This applies to pension funds and retirement annuity funds; provident funds allow you to withdraw the entire amount as lump sum at retirement.

After the new pension reform comes into force on 1 March 2016, provident funds will be subject to the same annuitization requirement as the other two fund types (except for contributions made pre-reform and for those aged over 55). At the same time, the threshold will double to 150,000 rand.

Taxation of Lump Sums and Retirement Income

There are numerous benefits to living in South Africa compared to the UK, but one thing you can’t escape in either country is taxes.

If you withdraw part of your pension as lump sum, it will be taxed at up to 36%. You can find the tax brackets and rates for the 2015/16 tax year on the official website of the South African Revenue Service (SARS) here.

Annuity income is subject to standard income tax, which is progressive with rates from 18% to 41% in the 2015/16 tax year. There are allowances based on age, ranging from 73,650 rand if you are under 65 to 128,500 rand if you are 75 or older. You can find all income tax brackets, rates and allowances for the current tax year at SARS website here.

Don’t Let Taxes Eat Up Your South African Pension

While most people acknowledge the importance of saving and retirement planning at some point of their lives, the effects of taxes on your retirement savings and income are often misunderstood and underestimated. While many expats enjoy living in South Africa, paying 36% or 41% taxes is not that pleasant.

Moreover, in case you won’t be spending your retirement in South Africa, you may end up paying big portion of your pension savings in exit charges and other fees when getting your funds out of the country. Unlike the UK and most other countries, South Africa has foreign exchange controls, which are administered by the Financial Surveillance Department of the South African Reserve Bank.

Transferring Your Pension Offshore

Whether you are planning to stay in South Africa for retirement or move to another country in the future, you can achieve significant tax savings and increase the flexibility of your pension by transferring it to a more favourable jurisdiction. Actually, some of the best options can be found close to the UK – particularly Guernsey has been very popular with South African expats.

Under section 40ee of Guernsey Income Tax Law, retirement income paid from a Guernsey plan to a non-Guernsey resident individual is exempt from tax. Moreover, when structured correctly, offshore pensions provide greater freedom in the selection of assets or currencies and can also help you minimize or completely avoid inheritance taxes in both South Africa and the UK (which you may still be liable to even when living abroad).

Naturally, international tax planning and pension transfers are very complex. Your personal circumstances must always be considered in order to choose a solution that is both tax efficient and compliant with the laws of all countries involved. You should always seek advice of a retirement planner who has experience with clients in situations similar to yours.


South African Public Pension

SARS – lump sum tax rates

SARS – annuity tax rates and allowances