Below are some answers – in layman’s terms – to often asked questions. This section serves as a source of information, where we try to cut through the technical jargon associated with the processes involved in the cashing out of retirement policies by Expats.
Please note that these answers do not constitute financial advice. Expatri8 is not a financial intermediary and does not give investment advice. Queries relating to your investment profile, retirement planning and wealth management strategy should be directed at your financial advisor.
Please send Claire a direct e-mail if you do not find what you are looking for amongst these entries, or if you need more detail or other information. (Simply click on the Ask Claire button at the bottom right-hand side of the page.)
Residency Status & Identity
How does residency status work?
In the view of the South African Reserve Bank (which manages Exchange Control Rules and Regulations) you are either:
- A Local Resident: South Africa is your primary residence, it is where you live.
- SA Resident Temporary Abroad: your current primary residence is in a foreign country.
- SA Emigrant: former SA resident (but still a citizen), now Non-Resident for Exchange Control purposes.
- Non-Resident: A foreign citizen.
All South Africans remain SA Residents irrespective of how long they may have lived overseas (”temporary“ abroad). This only changes if they formally changes their status to Non-Resident with the SARB. At that point they will be designated as being a SA Emigrant. The process of placing on record one’s intent to remain abroad permanently is referred to as Formal or Financial Emigration (see further down).
What is FICA?
The Financial Intelligence Centre Act (the FIC Act) came into effect in 2003. The FIC Act was introduced to fight financial crime, such as money laundering, tax evasion, and terrorist financing activities. The Act brought South Africa in line with similar legislation in other countries designed to reveal the movement of monies derived from unlawful activities and thereby curbing money laundering and other criminal activities.
FICA places obligations for customer identity – a crucial element of anti-money laundering enforcement in the financial system – on your bank, insurers and professionals (such as estate agents, brokers, and attorneys). All of these institutions have to implement strict measures to ensure they know who their customers are and to prevent criminals from using false or stolen identities to gain access to the financial system.
The implication is that your bank and insurer are required to obtain, and constantly re-verify, and retain certain information and supporting documents from customers before accounts can be opened or new transactions can be entered into.
This entails a fair bit of onerous red tape that varies from one institution to the next, which can lead to much frustration and costs, but the Act does much to protect the financial system.
What are Exchange Control Regulations?
Exchange Control Regulations are the legal provisions that limit the extent to which South African residents and companies may transfer funds abroad.
Why are there Exchange Controls?
The aim of Exchange Control is to restrict the buying and selling of a national currency and to preserve foreign currency reserves. Exchange controls are most commonly imposed due to Central Bank concerns about outward investment flows, serving as a shock absorber against sudden economic or politically induced movements. Whilst it has negative implications of investor sentiment, it is utilized by several countries that are vulnerable to currency shocks – especially Emerging Market Economies.
How is Exchange Controls (EC) enforced?
Exchange Control Regulations were promulgated in 1961 and since then regularly amended. In terms of the Exchange Control Regulations, the control over South Africa’s foreign currency reserves and spending thereof is, is vested in the Treasury (the Department of Finance). The Reserve Bank is responsible, on behalf of the Minister of Finance, for the day-to-day administration of exchange controls in South Africa, much of which is enforced through SA retail banks.
How does EC affect individual investors?
Each SA citizen – regardless of status – can take abroad R1m per calendar year (01 Jan to 31 Dec) without the need for a Tax Clearance Certificate from SARS. This is referred to as a Single Discretionary Allowance, or SDA, which can be used for any legal purpose abroad. There are a few simple declarations to sign and the bank will check the origin of the funds (i.e. the documents proving of sale of assets) to guard against fraud or money laundering, but it is a relatively quick and easy process.
Each SA citizen can invest a further R10m abroad (per annum) under the Foreign Investment Allowance (or FIA) provision, but this will require a Tax Clearance Certificate from SARS.
SARS thereby confirms that the funds are free from obligation to the Receiver. This may lead to an audit of the taxpayer, but generally is a pretty efficient process. The bank or foreign exchange intermediary will take care of the rest, as for SDA’s.
The provisions for SDA and FIA as described above therefore translate into a potential withdrawal of R11m per annum by each Expat under the existing Exchange Control Regime. Due to tax free donations being allowed between spouses a family unit could avail itself of up to R22m per annum under the normal Exchange Control regime.
It is technically possible to apply to take out more at one time. This too will involve clearance from SARS, but will then require a Special Application to the SA Reserve Bank via one’s own retail bank. The SARB will assess each application on its own merits.
What about foreign investment allowances for Formally Emigrated expats?
For Expats who formally emigrate the rules outlined above applies exactly the same (i.e. SDA and FIA allowance limits of R1m and R10m per annum), but they also apply for the export of household and personal effects (incl. motor vehicles, caravans, trailers, motorcycles, stamps, coins and minted gold bars) to an overall insured value of R2m.
What is Formal or Financial Emigration?
Formal or Financial emigration is the act of formally changing your status with the South African Reserve Bank from SA Resident to Non-Resident (Emigrant). It has nothing to do with the Department of Home Affairs, or your status with the authorities of your foreign country of residence. It simply says to the SARB that you have decided to remain abroad permanently.
Will Formal Emigration effect my South African citizenship?
No, it does not. Once a South African citizen, always a South African citizen, it is your birthright. You may retain dual passports, and you can return to SA any time.
Can I live abroad without ever formally emigrating?
Yes, and many South Africans do. (see next point).
Why would one Formally Emigrate?
Most people place their emigration on record simply to cash out their South African Retirement Annuities. Formal emigration is the mechanism used by the SARB, SARS, the banks and the pension fund administrators/insurers to control the process without providing a loophole for local residents to also cash out their policies.
There are other, less frequently cited reasons too, including for inheritance purposes, but the main purpose is to change residency status in order to cash out retirement policies.
Can the process be reversed?
Yes, very easily. The Emigration declaration confirms only that it is one’s intention to remain abroad permanently. Should circumstances change it is simply a case of returning to the country and notifying your bank of your change in residency status back to Resident from Non-Resident. In fact, it is a much, much simpler process then Formal Emigration.
What are the tax implications of Formal Emigration?
Formal emigration is likely to follow after your Tax Residency had already changed, but you could still remain an active tax payer in South Africa, especially if you have income, business ownership or assets remaining in South Africa. For example, you will still be liable for taxes including Capital Gains tax.
How does my banking service change after Formally Emigrating?
Your bank will open a special type of bank account for you, namely an Emigrant Capital Account, or ECA. All other bank accounts, debit and credit cards and retail accounts have to be closed. All assets remaining in South Africa has to be placed under the physical control of your bank.
This prevents the circumventing of exchange controls by local residents: the bank will have to check the source of all funds flowing through your ECA, and whether these sources tie up with the declarations made at the time of Formal Emigration.
For example, the bank will hold the title deed of any property that remains behind; any income generated by this property (e.g. rent) will have to be paid into your ECA, from where it can be paid abroad. Local payments can also be made.
Most banks now give Internet access to ECAs, typically allowing for local payments and debits. However foreign payments typically still needs to be manually cleared by the bank.
The funds in your ECA can also be accessed if you travel to South Africa, to be used locally.
Can I still own property and other assets in South Africa after having Emigrated?
Yes, see example cited in question above
What if I do not have a bank account in SA anymore?
This should not pose a problem. Please specify this on the quote sheet. A bank account can potentially be opened with the bank that you had previously used, or at another retail bank. As with everything else, we will explain how and provide the tools to do so.
Cashing out Retirement Annuities
Do I have to Formally Emigrate to cash out my Retirement Annuity?
Yes, it is the mechanism that the SARB requires in order to ensure that only bona-fide non-resident South African citizens can cash out their retirement policies. The aim of retirement products is to ensure that citizens save for their old age instead of becoming a burden on the state when they stop working. By formally notifying the SARB (and other institutions) of your intention not to return permanently to South Africa, you unlock the funds tied up in these policies. (See more about Retirement Product types in the next section.)
Is it only Retirement Annuities that can be cashed out by way of Formal Emigration?
Yes, although it may be possible to convert funds stuck in a Preservation Fund into a Retirement Annuity, and thereafter cash it out via this process. (See more about different Retirement Products in the next section.)
Retirement Product Types
What is a Living or Life Annuity?
These annuities are products that allow for ongoing investment income from retirement savings. With a Living Annuity the investor chooses the investments (thereby assuming some risk) and set their desired income level as well as investments.
A Life Annuity is similar to a Living Annuity but the pension is guaranteed for life at a pre-determined rate, typically more conservative (risk averse). No changes can be made to the income or investment after the initial selection.
How does a Living or Life Annuity work?
These annuities are where pensions (in full, or the remaining 2/3rds if a withdrawal had been made) are moved to upon retirement, with the aim of providing the beneficiary an on-going retirement income.
A Living Annuity is a permanent investment, regardless of the residency status of the beneficiary. Once invested, these funds are there until death or depleted (Living Annuity) or death (Life Annuity).
What is a Retirement Annuity (RA)?
A retirement annuity is a tax-efficient method for the individual to save for retirement. It offers an investor the opportunity to select a suitable, long-term investment portfolio and contribute to these investments every month. These products are typically subscribed to by investors who do not have access to a formal employer pension fund (e.g. for the self-employed), or by those wishing to invest in a retirement savings product in addition to their employer pension or provident funds. The tax advantages serve as a government incentive to utilize these type of products to provide for one’s old age.
How does an RA work?
The (legislated) earliest retirement age for RA’s is 55, regardless of inception. Therefore, to access cash out of the policy one would have to wait until your 55th birthday. Once turned 55 you can then elect to either:
- Leave the funds in the RA and let it roll over until you are ready to withdraw some funds;
- Cash in the whole policy but only if it is of a value less than R247,5k in one policy (or in multiple policies as long as their cumulative value does not exceed R247,5k);
- Cash in one third (1/3rd) of the policy value (tax free if this portion is less than R500k) and invest the balance (2/3rds) permanently in a Living Annuity.
The cash proceeds can then be used for any purpose – including a normal foreign investment transfer (SDA or FIA).
However the remaining funds (two thirds) invested in a Living Annuity are effectively stuck there forever; there is no mechanism to get those funds out. These funds can be withdrawn at a maximum rate of 17,5% per annum, until depletion (or death). Such withdrawals are taxed at normal salary tax scales.
What is a Pension Fund?
Whilst RA’s are retirement-savings products aimed at self-employed individuals (or those who want to augment their existing employer-offered retirement savings vehicles), pension funds (and provident funds) are available to formally employed individuals in the form of a pooled retirement fund offered by their employer.
Contributions to a pension fund are tax-exempt for the employee, but the proceeds are taxed when paid out in future. This serves as a savings incentive.
How does a Pension Fund work?
Should an individual leave the employment of the company before retirement age – due to dismissal, retrenchment or resignation – the proceeds of their pension savings in the employer’s fund can be either cashed in (in part or in full) or transferred (in part or in full) to a preservation fund (see further down).
However, if the employee stays with the company all the way to retirement age, and then officially retires from a pension fund, the investor can only take a once-off lump sum pay out of their pension savings to a maximum of 1/3rd of the value of their funds at that point. The balance (2/3rds) has to either stay in the fund (if allowed by the fund rules) or go into a Living Annuity (where it will be stuck until death or slowly depleted by way of maximum annual withdrawal limits).
What is a Provident Fund?
A provident fund is the same as a pension fund, except that only the employer claims tax deductions on provident fund contributions – not the employee. This means that employees would have contributed to a provident fund with after-tax money, and they will hence receive the money back tax-free at retirement.
How does a Provident Fund work?
Unlike a pension fund (each of which has their own rules), one can take the full lump sum pay-out from a provident fund upon retirement. There is no 1/3rd-over-2/3rds rule.
What is a Preservation Fund?
A preservation fund serves as a savings fund into which proceeds from a pension or provident fund are paid. When employment ends due to dismissal, retrenchment or resignation, the employee’s funds can typically(*) not remain in the employer’s pension fund. The ex-employee can then either elect to cash it out in part or in full, or transferred the proceeds to a preservation fund (in part or in full). It is essentially a ’parking place‘ from where the funds can be moved into another retirement product at a future date (e.g. a Living Annuity). It ”preserves” retirement investments and is tax neutral
(* There are exceptions: In some cases a pension fund’s rules may allow an individual to remain invested in the fund after leaving an employer and choosing not to withdraw. These are termed deferred members. When they then eventually retire these members can receive on-going benefits from the fund; or if they die these benefits may be payable to their dependents. But similarly to an investor of a Living Annuity, a deferred member cannot make a full withdrawal from the fund, ever.)
How does a Preservation Fund work?
If transferred directly to a preservation fund in full (i.e. no withdrawal made), one single withdrawal can still be made from a preservation fund at a future date – either in part or in full. This is a benefit of a preservation fund over for example, an RA, where the funds will be stuck until 55 (and then only 1/3rd available). On the other hand, if transferred only in part, a withdrawal had in effect already been made, and so the funds will be stuck until retirement – similar to an RA.
What is a Life Policy?
A Life Policy is a contract with an insurance company that offers a death benefit (lump sum payment) to the beneficiaries of the insured in exchange for monthly premiums. These policies may include cover for dread disease and disability so that the insured will receive either a lump sum pay-out or a monthly income for a set period of time depending on their claim (illness, disability or loss of income).
How does a Life Policy work?
Policies taken out before 2003/4 could include an investment portion, which can technically be claimed upon surrender, but this is typically very small. The process is complex and should be handed over to a specialist (broker or financial advisor) to deal with.
If a life policy is ceded to a bank the ceding can be cancelled once the debt linked to the cession has been paid.
What is an Endowment Policy?
Endowment Policies are similar to Life Insurance except that it pays out a lump sum after a specific term or on death. The policy owner (insured) can select the investment term, for example five, ten, fifteen or twenty years.
How does an Endowment Policy work?
South Africans abroad can simply and easily surrender their endowment policies as long as they have not been ceded to a bank (in which case the ceding will require cancellation before funds can be released).
How does an Endowment Policy work?
South Africans abroad can simply and easily surrender their endowment policies as long as they have not been ceded to a bank (in which case the ceding will require cancellation before funds can be released).
Who can convert my funds from Rands into foreign currency?
Only a licensed bank (designated as an Authorized Dealer by the SARB*) is allowed to convert your funds to foreign currency. Your bank’s Foreign Exchange (Forex) department will ensure that all relevant paperwork and declarations are signed off and in place prior to booking the deal.
However, you can also make use of a Foreign Exchange Intermediary (or FEI) to facilitate the transaction on a bank’s platform. FEIs have to be registered with the SARB, and last count there were more than 70 of them in South Africa, mainly serving local import-export businesses.
These intermediaries are essentially brokers that manage the relationship with the customer. They all promise lower transaction costs and better service than the bank, but this is difficult to ascertain upfront. The intermediary will have an arrangement with one or more banks to ‘push’ customers via that bank, in return for a slice of the margin that the bank will levy on the transaction (the forex margin – see below).
FEIs are not banks; the funds will always be in the bank account, and the FEI will act under mandate from the client to process the forex transaction at a bank. The transaction may or may not cost the customer more than dealing directly with their bank.
Important Note: Once funds are in an Emigrant Capital Account (ECA) – for example in case of financial emigration having been effected in order to cash out an RA – the funds can only be converted and paid abroad by that bank. There is no option to then shop around for an alternative dealer.
(* There are technically also Authorised Dealers with Limited Authority, or ADLA’s, that are allowed to exchange currency, including money-exchangers.)
How does the forex transaction work?
Once the funds have cleared in your account the bank will refer you to their Forex Department, which will need the necessary paperwork to process the transaction.
For normal transfers abroad to a value of under R1m per annum per person the bank will require only the source-of-funds information and a declaration. In the case of larger amounts (up to R10m per annum per person) the bank will also require a Tax Clearance certificate.
However if the funds are the result of a Retirement Annuity having been cashed out, the funds will be in your Emigrant Capital Account and should be cleared to go.
These days nearly all the banks have electronic banking access via which you can effect the transaction:
- set up the international beneficiary (destination bank account)
- upload the required documentation
- choose the relevant transaction category (some banks still require a Balance of Payments form to be completed, signed and uploaded)
- confirm the currency
- accept the rate.
The mechanics are pretty simple and easy to handle.
What are the currency conversion cost to look out for?
The jargon and the costs involved can be confusing for the layman, often leaving investors surprised to discover that less money arrives in your foreign bank account than what had been expected. There are 4 types of fees (sometimes hidden) that you will want to understand upfront:
1. The Exchange Rate offered:
The most important impact on the value of one’s funds is the exchange rate at which the conversion of your funds to the foreign currency of choice will take place.
The exchange rate that one sees in the news and many online sources (e.g. xe.com and many others) is the mid-market rate, derived from the last trading value. This is very rarely the exchange rate that one will get from the Dealing Room at your bank when you are ready to buy foreign exchange. The mid-rate rate moves all the time (the ZAR is the 20th most traded currency in the world) and there will be “buyers” and “sellers” of the currency above and below this rate. As a “seller” of Rands (ZAR) you will be offered an exchange rate at a lower value for your Rands than the mid-market rate you see on a screen.
Your bank will have taken a position in the foreign exchange market. Depending on their position, they will offer a slightly better or worse rate, but always at higher ZAR (or less foreign currency).
For example, you want to convert R100,000 into US dollars (i.e. you’re buying US dollars): the mid-market rate at the time is R14,00 per US$. However your bank may only offer you US$ at only R14,30. It will be unknown what the bank paid for these US$ in the wholesale market (or will need to pay if they do not hold a position and need to bulk purchase dollars), but essentially the 30 cents plus the difference between the mid-market rate and what they paid for the foreign currency, will be the bank’s margin (gross profit):
- The margin can range anywhere from 0.3% for large amounts up to as much as 3% or more of the transaction value – whatever they can get away with.
- The margin is lower the larger the transaction size; some banks will only start negotiating a better rate above a threshold (e.g. R100k).
- If there is an intermediary involved there will be a sharing of this margin between the bank and the intermediary.
- The margin will adjust with the exchange rate all the time, and once quoted will have a very limited time period during which confirmation needs to take place.
2. SWIFT Fees:
SWIFT stands for “Society for Worldwide Interbank Financial Telecommunication.” SWIFT is an organization that handles secure transactions and communications between banks worldwide. Each bank has its own code that identifies where the communication originates and what business it is intended for. Banks pay a facilitation fee for each transaction, which is passed on to the customer.
This fee is deducted from your funds before the currency conversion takes place. The fee varies from bank to bank (some banks add some margin to this fee), and there are two main types of SWIFT FEES to be aware of:
OUR – this means that the full SWIFT fee is covered by your South African bank. This fee is typically around R450.
SHA – this means that the SWIFT costs are shared between your South African bank and the foreign (destination) bank. The upfront fee will be lower (around R250), but then there will be a deduction on the foreign bank’s side.
The latter (SHA) typically works out to cost more than paying it all on the SA side of the transaction (in Rands).
3. Admin Fees:
Admin fees can quickly ad up to significantly impact the cost of a forex transaction. Banks have to specify this fee (0.5% or more), but one may only find out the true impact afterwards. Admin fees come in many disguises: transaction costs, handling fees, card fees, processing fees, account fees.
One can easily stare at the exchange rate and then be blindsided by a commission hidden in the fine print, especially when dealing with an intermediary. For example, they may advertise that they offer the best exchange rates, but then make up for this in admin fees and commissions. (On the other hand, some intermediaries will advertise “No Commissions”, but then make more money on the exchange rate.)
Should I try to “time” the market?
The Rand is one of the most volatile currencies in the world, and movement is very, very difficult to predict in the short term. There are so many factors at play, both economical and political and both internally and externally to the country (e.g. commodity process), that predicting short term movement has caused many burnt fingers – professionals included.
However what is undisputed is the long terms deterioration, and the question one should ask is what will my investment be worth in foreign currency in 3 or five years from now, not tomorrow or next week. It is typically better to take a medium or long term view (Rands) instead of trying to time the market in the space of a few days or weeks or even months (cents).
How long has Expatriate been in operation?
Claire first started assisting a few family members and close friends during 2014. They approached her due to her knowledge and experience of non-resident banking services from her time working at one of the banks back in SA. As word spread more and more South African expats were referred to her – mainly in the UK but soon from further afield, including Australia, New Zealand and the USA. Claire simply operated informally, providing free information on how to go about cashing out policies back in SA. But by end 2017 demand grew to an average of 14 clients per month, a number expected to continue growing as more and more expats look to cut their last financial ties with SA. A better system had to be implemented to handle all the enquiries whilst still providing an efficient service. This website and a low fee structure to cover overheads were launched at the end of 2017 in order to do just that.
How is your fee so low compared to Financial intermediaries?
This is by design: Claire does not give financial or investment planning advice or take commissions, margin fees, or kick-backs from banks or institutions, and no personal or financial information are required or recorded. Her clients have already decided they want to cash out their policies; Claire simply assists them in navigating the administrative red tape involved, and guidance on how to evade the pitfalls. She therefore does not act – nor is required to be registered – as a Financial Service Provider (FSP) back in SA. This also means she does not carry any of the overheads associated with that type of business.
Furthermore, E8 has only one employee. It is essentially an information-provision service which aims to empower Expats to cash out their own policies, so that they do not fall victim to an expensive, superfluous “convenience” sold to them by a middleman or financial intermediary. (There is a place for the latter, but only if real financial advice or planning is required and if the funds are large enough to ensure that the high fees are sensible.)
How do I claim my Money Back Guarantee?
Very simple: if you received incorrect guidance based on the information you provided, and this prevented you from cashing out your policy, you simply notify Claire and she will arrange the refund of the fee. As the low fee demonstrates, the aim is to help expats, not make money off them. The only caveat is that we cannot be held responsible for changes in legislation or institutional process. However these can usually be easily overcome if an alternative or adjusted process is viable.
Why online but not telephonic support?
Online or e-mail assistance allows for effective time management for both parties. Claire – with whom you will be communicating if need be – frequently travels between the UK, Europe and Durban, South Africa, and will not be in a position to take a call. But she will be able to respond on e-mail within hours. The aim is to keep overheads low, and not employ and train and house dedicated staff to answer phones. Time-zone difference is another factor, especially as more and more clients based in North America and Australasia come on board.
I need assistance with other expat services?
Expatri8 renders an administrative service. The majority of our clients simply require the assistance to do what they have already decided to do. We do not give financial, investment or retirement planning, tax, accounting or legal advice. However, should you need to be referred to a specialist in any of these fields, please complete the form below to tell us what type of information you require, so that we can refer you to one of our wide network of professionals in all these areas.
Please note that we provide you with their details, not the other way around. You can then decide to contact them in your own time; you will not be bothered by unsolicited contacts from these parties.