How you can cash in your RA, yourself.
Expat South Africans – living the world over – often have assets and investments remaining in South Africa.
Liquidating the assets and withdrawing the funds from SA can be easy or difficult depending on the type of investment and the personal circumstances of the individual. The information below is intended to provide information in layman’s terms.
Some of these funds may be in cash (e.g. savings, inheritances, proceeds of an asset sale such as property), or in investments that can easily be liquidated into cash (e.g. shares or unit trusts). It is relatively easy to extract liquid investments from SA, as exchange controls allow for up to R22m per family per annum to be transferred abroad.
How does that work
- Each person can take abroad R1m per calendar year (01 Jan to 31 Dec) without the need for a tax clearance from SARS. This is referred to as a Single Discretionary Allowance, or SDA. 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 person 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 for the exact amount. 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 above two 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 could avail itself to up to R22m per annum under the normal Exchange Control regime. It is 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 consider the merits of each application, and will generally agree to larger amounts if all declarations are found to be in order. Success in transferring funds out under SDA and FIA involves ensuring that you have the documentary proof of where the money comes from, that your tax affairs are up to date (for amounts larger than R1m), and that you have a valid bank account (in your name) through which the funds can be paid abroad. Once all is in order the only remaining item will be to negotiate the exchange rate and have your bank transfer the funds abroad. (Read more…) [Link to FAQ: how do foreign exchange transactions work?]
- Instruct that the investments be sold or ”cashed in”;
- Transfer the proceeds into a bank call account in your name;
- Sign various bank declarations indicating residency status;
- Provide source-of-funds documentation (proof of origin/transaction: where does the money come from?);
- Select the type of Exchange Control transaction: SDA (under R1m) or FIA (R1m – R10m); [Link SDA and FIA to FAQ’s]
- Get tax clearance certificate if FIA;
- Submit docs and process foreign exchange transaction via a retail bank or a forex intermediary.
Retirement products (policies, pensions) are strictly governed by legislation designed to encourage and thereafter enforce long-term savings with the express aim of preventing residents of the country from becoming dependent on the state in their old age. (Read more about the different types of products.)
These savings are therefore more challenging to cash out – if not entirely impossible. Specifically, retirement annuities (RA’s) can only be accessed at age 55, and then only 1/3 can be taken out in cash whilst the rest must be reinvested in a Living Annuity.
This is problematic for – and inherently unfair towards – SA expats who have permanently established a new life abroad and hence require their funds (for their old age or other purposes) in their new country of residence. If they have no intention of returning permanently to SA they will clearly not become a burden on the local economy.
This fact was finally recognized by the authorities and in 2008 the Tax Act was amended to allow for the early encashment (i.e. full benefit withdrawal) of RA’s before the age of 55 by South African citizens who are permanently settled abroad, and whose intention is not to return to South Africa as a resident in the future.
The mechanism through which this is managed is an administrative procedure called Formal or Financial Emigration. It essentially changes the residency status of the individual from Resident to Non-Resident, and formally records the new status with the South African Authorities. It involves a prescribed administrative process involving the SA Reserve Bank, SARS and the individual’s local institutions (bank and insurers). At the end of the process the insurer is allowed to cash out the retirement policy and the bank is allowed to transfer the proceeds abroad.
What does the Formal Emigration process involve?
What are the practical implications of Formal Emigration?
- South African source inheritances;
- the proceeds of the sale of all assets declared in the emigration application;
- passive income derived from investments remaining in SA (e.g. rent, dividends, director’s fees, salary for services rendered in South Africa and income from discretionary or vesting trusts);
- proceeds from a third party life policy.
As a Formal or Financial Emigrant one will have a single bank account, called an Emigrant Capital Account, or ECA (previously known as a ‘blocked account’). This account will typically allow view access but will have restricted on-line functionality. The retail bank with which it is held will control and administrate it. The bank will take responsibility that all transactions are aligned with the declared assets before transferring any proceeds abroad. (This prevents Exchange Control fraud by residents laundering funds through a friend’s ECA.) One can have no debt (apart from certain approved liabilities such as bonds) and no other bank accounts or bank cards.
There are many policy types, the most important of which for this exercise are Retirement Annuities and Preservation Funds.
Retirement Annuities (RA’s)
By utilizing the mechanism of Formal or Financial Emigration, the Expat* can cash out their RA’s at any age (before 55), and in full (not only 1/3). This is the only way to access the funds other than to wait to the age of 55 (but then only getting out a small portion in cash).
- This has to be done whilst the funds are still in an RA; once a withdrawal had been made (post-55 years of age) and the balance has been transferred to a Living Annuity the funds will be stuck and the expat can only access and transfer abroad a maximum of 17% of the value each year.
- If the combined value of your RAs is equal to or less than R247,500.00 and if you are very close to turning 55, then it may be worth simply waiting and then cashing the whole thing out instead of going through the Formal Emigration process (assuming the value remains below the threshold). Ditto if you have already turned 55 – you can simply cash out in full and transfer the lot abroad as SDA or FIA; no need to Formally Emigrate.
Pension, Provident and Preservation Funds
If a pre-retirement expat has investments in a pension (or provident) fund back in SA, the way to get funds out would simply be to retire from the fund and cash in the full value to take out as FIA or SDA transfer. Formally, emigration is not required here.
If an Expat is at retirement age then they can elect to cash out up to 1/3rds of the fund value and this portion can taken out by way of normal SDA or FIA. But unfortunately the other 2/3rds will be stuck in a Living Annuity and cannot under current rules be cashed out. Formal Emigration will not assist here.
On the other hand, if an expat is already officially retired from the pension fund and did not elect to take out 1/3rd, there is nothing that can be done except getting a directive to not be taxed on the benefit withdrawals made. Formal Emigration will not assist here.
Preservation Fund, no withdrawal
If an expat had converted his full pension into a preservation fund back in SA (i.e. no cash withdrawal had ever been made), the way to get funds out would also simply be to make a single, full withdrawal and take out the cash value as an FIA or SDA transfer. Again, Formally Emigration is not required here.
Preservation fund, one withdrawal
If the funds had been moved to a preservation fund and one withdrawal had already been made, the investment will typically be stuck. But there is a work-around by way of the Formal Emigration route:
First have the funds transferred from the Preservation Fund into a new R.A. – a step referred to as a Section 14 transfer – and then cash out the RA by way of Formal Emigration (as described above).
Life Policies are insurance products not retirement savings products. Policies taken out before 2003/4 could include an investment portion, which can technically be claimed upon surrender, but this is typically very small. Formally emigration is not relevant here.
Endowments are savings products; 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). Formally emigration is not required here.
Living and Life Annuities
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). Whilst policy surrenders are sometimes technically possible if the investment value had fallen below certain thresholds, there is generally little to be done about a Life Annuity. Emigration Encashment does not offer a solution.
Note: A Living Annuity can be drawn down over time by withdrawing income at a higher rate than investment growth provides as a way of whittling down the capital value. The maximum rate of withdrawal is 17,5% per annum. This would be the only remaining avenue for the investor already stuck in a Living Annuity who wants to get their funds out as fast as possible.
But in the case of Retirement Annuities and in the case of Preservation Funds (which can typically be converted into RA’s by way of a Section 14 transfer), the process of Formal or Financial Emigration makes it possible for the SA Expat to get the funds out of the product and into a Emigrant Capital Account (blocked account), and then from there out of the country.
Unfortunately there is no escaping the taxman, whatever route one follows. For example: Should you decide not to cash out your RA and instead retire out of it at the age of 55, the first R500k is tax free (for withdrawals up to 1/3rd of the benefit value), followed by a a sliding scale up to 36% at amounts in excess of R1,050m. However: the rest of the RA (2/3rds) must be invested in an Annuity – where it will be stuck. And monthly benefit payments out this Annuity will be taxed as income.
On the other hand, as an Expat, should you Formally Emigrate and cash out the whole benefit the lump sum will be taxed according to the following scale:
First R25000: no tax
R25,001 – R660,000: 18%
R669,001 – R990,000: 27%
To get the funds out tax has to be paid, there is no escaping it whatever choice one makes. So, as illustrated above, most Expats seem to agree that it is worth paying the tax to free their funds now, instead of paying tax in future anyway (and still have all the risks). The insurance company has to get a tax directive from SARS in order to deduct the tax at the correct rate before they can pay out the benefit to an Emigrant Capital Bank Account (ECA).
Note: there are certain countries where the double taxation agreement (DTA) between South Africa and that country does not allow for any taxation at source. In such a case it may be possible to claim back the tax afterwards. Expatri8 is not a Financial Service Provider and we do not give financial advice, but we can refer you to a tax practitioner that is familiar with this aspect of taxation to assist you. Please Ask Claire
Apart from tax there are a number of other costs associated with this exercise, mostly bank-related, and none of them avoidable. These costs alone should not be an impediment to following through, but please note that, should you decide make use of a Financial Services Provider as an intermediary to process your emigration via your bank and insurer(s), you will still pay all these costs; their fees will simply be lumped on top.
- There will standard bank transaction fees, small deposit and withdrawal fees, varying from bank to bank and typically depending on your existing bank account fee structure.
- Each bank will levy an in-house Emigration Fee for placing the matter on record with the Reserve Bank, and opening an ECA in your name. This varies from bank to bank, but ranges between R2000 and R5000. It will be charged to your bank account.
- There will be costs related to the conversion of your funds from ZAR to foreign exchange and depositing these funds abroad. These fees could include an Admin Fee, Bank Transfer Fee (SWIFT), and commission (margin levied on the conversion base rate). This varies from bank to bank and is very much dependent on the amount traded (higher percentages on smaller amounts), and can add up to 2% or even more.