South African expatriates considering an early withdrawal from their retirement savings in South Africa now that the new Two-Pot Retirement system is in place, should get their timing right. There is now a golden window to access your retirement funding and especially for those who have left South Africa long ago and decided to just keep their retirement “parked” for a later day, the time for action has arrived and procrastination may be very costly.

A favourable exchange rate, the fact that withdrawals from the Savings Pot is immune to the three-year lock-in period which applies to early withdrawal of lump sum benefits of retirement vehicles, even retirement annuities in South Africa, and one withdrawal allowed in a tax year, can all influence expats’ decisions in this regard. 

The Two-Pot Retirement system, which came into effect on 1 September 2024, allows early access to a part of retirement savings from the so-called Savings Pot before retirement age. The rest will be preserved in the Retirement Pot and is only accessible at the time of retirement.

The Savings Pot of each retirement product has been funded with once off seed capital of R30,000 or 10% (whichever is the lowest) taken from your retirement savings as on 31 August 2024. Going forward, one third of the monthly contribution goes into the Savings Pot and two thirds to the Retirement Pot.

By mid-September the South African Revenue Service (SARS) already received applications for the withdrawal of a whopping R4.1-billion.

There is often little guidance to South African expatriates abroad on when an early withdrawal from South African funds would be in their best interest. This may be because retirement fund administrators and local advisors also continue to earn a return on investment for as long as an expatriate’s funds remain within their control. 

According to the latest figures by the Association for Savings and Investment South Africa (ASISA), who represents the collective interests of the country’s asset managers, the industry has assets under management to the value of $194-billion, or close to R3.402-billion at the current exchange rate.

The National Treasury is clear that retirement money in the Savings Pot should be used for emergencies. Financial advisors say it is best to keep the money invested, because those who don't withdraw will have more savings at retirement. Withdrawals are also taxed at the taxpayer’s marginal rate and attracts a service fee for each withdrawal. 

AN EXPATRIATE’S TIMING FOR WITHDRAWALS 

Consider the currency and exchange rate performance

When making a withdrawal, exchange rate fluctuations are critical from a timing perspective. Having this in mind, expatriates cannot ignore the benefit of making an informed decision when withdrawing from their retirement savings while the market is in their favour. Currently the rand/dollar exchange rate is at its best levels in 12 months. 

Savings Pot immune to three-year lock-in rule

Expatriates are immediately permitted to make one withdrawal per tax year from their savings pot. The current tax year ends on 28 February 2025. This money can be helpful for those expatriates who need it abroad, as it will not be tied up for three years. The three-year lock-in rule came into effect in March 2021. Since then, people who are no longer South African tax residents, must maintain this status for at least three consecutive years before they receive their money from the preservation fund. Where you have the legal basis to back-date your financial emigration, which is not an easy SARS process; you can access your whole retirement savings before it has been annuitized. Arguably, as an expatriate abroad, you should never select the annuity option before you have obtained specialist advice.

Failure by employers to pay over contributions to retirement funds

An early withdrawal would trigger the need for a compliance check to ensure that an expatriate’s employer has been contributing to their retirement fund. This is underpinned by a report from the Financial Sector Conduct Authority in March 2024, confirming that more than 4,000 employers have historically not been making contributions towards their employee retirement funds.

TAX COMPLIANCE, THE FINAL CATCH

Tax compliance is the starting point for expatriates abroad wanting to access the part of their retirement funds now allowed under the Two Pot System. Any non-compliance in South Africa will lead to a deduction from your withdrawal amount to settle any outstanding tax to SARS. Practically, this entails that any request for a withdrawal from an expatriate's retirement savings in South Africa, will require a tax directive from SARS confirming tax compliance. 

TIME IS OF THE ESSENCE

It is best to consult Two-Pot specialists who can navigate the practical implications relating to withdrawals from retirement savings still held in South Africa.

Written by Delano Abdoll, Legal Manager: Cross Border Taxation at Tax Consulting SA; and John-Paul Fraser, Tax Attorney at Tax Consulting SA