Question

My family is in the process of emigrating to the UK. I am 50 years old and currently have R3-million in my company pension fund. I do not need this money just yet because I made a decent profit from the sale of our family home. I am not sure what to do. Do I leave it in South Africa or withdraw it and take it across to the UK?

Answer

I have had several questions like this recently. Each person’s situation is different, so you should run your calculations past a financial planner before making a final decision.

I will run through the tax implications of each decision and flag some of the issues that you should look out for:

Option 1 – Full withdrawal benefit

I always recommended that clients think very carefully before they withdraw their money from a retirement fund. The tax rates are punitive (36% for everything over R990,000) and this can decimate your retirement savings.

In your situation, you will be paying 31% of your accumulated retirement savings in tax. You will thus be able to take just over R2-million across to the UK with you. You can take this immediately (after you get the necessary forex approvals).

This withdrawal benefit is available at any stage before you retire from the fund.

Option 2 – Keep the money in an SA retirement fund until you’re 55

At the age of 55, you may retire from a retirement fund. There are significant tax advantages if you retire instead of withdrawing from a fund.

You are allowed to take one-third of the value of the fund out as a lump sum. This lump sum is taxed at preferential rates. The first R500,000 of your lump sum is tax-free and I usually advise my clients to take this and invest it in a discretionary investment plan to use as an emergency fund.

In your instance, you will be allowed to withdraw up to R1-million as a lump sum – this is one-third of the R3-million you have in the retirement fund. This will be taxed as follows:

Most of my clients restrict their lump sum to R700,000 because, after that, the tax rate is quite high.

The balance after you have taken the lump sum must be used to purchase a pension. If you take a R1-million lump sum, you will have R2-million to purchase a pension, such as a living annuity. With the living annuity, you will be able to invest the money in any local or offshore portfolio, provided the platform you use has access to it. You must take a pension of between 2.5% and 17.5% of this lump sum. For someone aged 55, a drawdown of 4% would be recommended.

If you do not need the money when you turn 55, then you should consider leaving your money in your preservation fund. Here, it will grow in a tax-free environment. South Africa is one of the better emerging market economies and will provide a nice element of diversity to your finances now that you will be based in the UK.

If you preserve your money in South Africa, you are allowed to leave it in your current pension or provident fund. There are often savings in fees to be had by going this route.

The downside is that you are often restricted in terms of the portfolios you are allowed to invest in. If you move your preservation into a proper preservation fund, you will have access to a much wider range of portfolios and, if chosen wisely, your returns after costs could be significantly better.

You may have heard something about a three-year restriction on retirement money when you emigrate. Under normal circumstances, if you have a retirement annuity, you cannot access the funds before you turn 55. However, if you leave South Africa and are ordinarily resident outside of South Africa for at least three years, you will be able to withdraw your money from a retirement annuity before the age of 55. Remember that the withdrawal tax is punitive so it may be better to wait till you turn 55 before you retire from the fund.