The much anticipated two-pot retirement system, introduced as a “knight in shining armour” for South Africans, has received a new implementation date of March 2024. Expats are cautioned to pay attention to the effects that this will have on the encashment of their retirement savings.

While many have addressed the two-pot system and its possible effects on South African residents, very little has been outlined regarding the practical impacts this system will have on South Africans who have ceased their tax residency – the expats.

A brief recap…

Expats have faced quite a number of challenges with encashing their retirement funds; from the introduction of the three-year lock-in rule to the knotty requirements faced with policy providers. Attempting to encash retirement savings and access retirement funds after cessation of tax residency requires significant attention to detail and often expert guidance as well. 

The spring from which the encashment of an expat’s retirement funds flow, is the formalisation of their cessation of tax residency. While previously, this may have been a simple process whereby the South African Reserve Bank allowed immediate encashment upon formalization of non-resident tax status, recently, it has been transformed into a far more rigorous exercise.

Expats are now required to engage with the South African Revenue Service (“SARS”) to obtain a “Notice of Non-resident Status” letter. Following this, the equally important Approval International Transfer Tax Compliance Status process must be adhered to, to allow for the remittance of encashed retirement funds. 

Even with the already existing challenges, the tax implications for encashing retirement funds have always been quite straightforward. In simple terms, the relevant tax table to be applied to the tax calculation was determined by the type of encashment. 

It appears, however, that the new retirement fund encashment dispensation will pose additional obstacles to those navigating their policy encashments without a guide.

A new (but tangled) dawn

While the proposed new laws are referred to as the ‘two-component’ system, the implementation hereof will actually provide a definition for three different components, which are colloquially referred to as ‘pots’. The savings, retirement, and vested components will have defined encashment parameters for those who cease to be tax residents, which could lead to adverse tax implications for each of these components if improperly approached. 

Under this new system, a third of all retirement savings will fall under the savings component, with the remaining two thirds falling under the retirement component. The vested component will consist of all retirement savings prior to the commencement of this system, and will be treated the same as they are currently being treated (i.e., separate to the two-pot retirement system).

In terms of encashment, one withdrawal per year will be allowed from the savings pot, prior to retirement, up to the full value of this component.

On ceasing tax residency, withdrawals from the retirement pot may be allowed, subject to the three-year lock in period. Similarly, withdrawals from the vested component will be allowed, in line with the current position, but also still subject to the three-year lock in period (as is currently the rule).

For expats, the two-pot system may require the categorisation of each of the pots to be taxed separately in accordance with their differing values. 

With no firm direction from SARS, expats may need to prepare for the tax implications on each of their savings, retirement and vested components once they have ceased to be tax residents and and should they seek to encash their benefits thereafter. 

The expat guide

Although still in its early stages, the two-pot system threatens additional complexities for those ceasing their tax residency and intending to encash their retirement funds. Whether National Treasury and SARS intend to create uniformity with the encashment of expat retirement funds is yet to be determined. 

Creating a roadmap, not only for the cessation process but also for accurate tax declarations and successful offshore remittance of retirement funds, has proven to be a necessity. As South Africa’s retirement system undergoes significant transformation, expats must recognize the value of seeking expert advice and guidance in this area.

Written by Micaela Paschini, Tax Attorney at Tax Consulting SA; and Khutso Makgoka, Legal Consultant: Expatriate Tax at Tax Consulting SA