Retirement savings quandrum when considering emigration

CatalystPlanning, Retirement, Savings

With all the political and socio-economic challenges in South Africa emigration numbers continue to rise. Those remaining in the country are questioning if a retirement savings investment is worthwhile when emigration remains a future option.

Elena Bevilacqua, Certified Financial Planner ® professional at Fiscal Private Client Services looks at the concept of saving for retirement, “As soon as one starts earning an income, saving for when you can no longer draw a salary, becomes an important part of your financial plan.

“If for example you earn an income from 25-65 years of age – that gives you a window of 40 years to save. If you are healthy and likely to live a long life, there is the possibility that you will need to draw on your savings for 25 years post your retirement: 65-90 years. This means you need to have saved enough money during your working years, so that after retirement you can draw an income for a further 25 years.

“Many people I talk to expect to be working into their golden years, but will their health allow it? And will they still be employable – a fair question in the rapidly changing age of technology,” says Bevilacqua.

During the 40 year window of earning an income, individuals and families are not only saving for retirement but some will need a deposit on a first home, a car, school fees etc. It is highly likely that the first 10 years of anyone’s career, just managing to meet expenses is a reality. Therefore, the saving period has likely reduced from 40 to 30 years.

Bevilacqua explains, “You now have 30 years of saving to provide you with 25 years of income when you can no longer work. And this is assuming there are no unexpected financial events or surprises along the way! Added to this, many will be looking to leave South Africa and may possibly spend their retirement years in another country.”

Formal emigration requires a number of financial considerations including (and not limited to) ensuring that your tax affairs are in order and paying any capital gains tax on your assets. If you have accumulated savings in a Retirement Annuity the question remains – has this been a worthwhile investment platform?

Contributions to a Retirement Annuity are tax deductible (1). However, a Retirement Annuity can only be accessed from age 55. If you have not taken your allowance (2) you are entitled to the first R500 000 of your retirement annuity tax free. The balance must be used to purchase a compulsory or living annuity paying you a monthly income. “If you are officially emigrating, you can withdraw the full capital any time, which will be taxed. (3)”

Bevilacqua adds that growth in a retirement annuity has limitations due to the regulated asset allocation. The basic underlying limits imposed under Regulation 28 of the Pension Funds Act states:
• 75% in equities
• 25% in property either local or international
• 30% in foreign investments excluding Africa, and
• 10% in Africa, not counting South Africa

If however you invest your savings in a non-retirement product, you forfeit the tax benefit of your annual contributions. You will also pay tax on interest and dividends earned, and you will be subject to Capital Gains Tax. Your non-retirement investment does not have Regulation 28 limits, thereby allowing a broader opportunity to target higher returns in offshore markets. Options in non-retirement investments are products like a Linked Investment which has wider flexibility and higher tax implications; an Endowment/Sinking Fund which has term restrictions and a 30% cap on tax payable; and/or a combination of products will ensure you are structuring your financial plans to align to both your retirement and emigration plans.

Bevilacqua’s final piece of advice for people who may want to emigrate, “Make sure that your investment framework is structured with your own personal goals in mind. When you start putting together your financial savings plan, it is important that your certified financial planner is clear about your personal goals, and tailors your investment options with them in mind. While you may forfeit tax benefits, you may improve your long-term opportunity of having offshore funds.”


1,2. Pension, Provident and Retirement Annuity Fund Contributions

Contributions to a pension, provident or retirement annuity fund during a tax year are deductible by the member of the fund. The deduction is limited to the greater of:

• 27.5% of the employee’s remuneration for PAYE purposes (excluding retirement fund lump sums and severance benefits); or
• 27.5% of the employee’s taxable income (excluding retirement fund lump sums and severance benefits).
The deduction is limited to a maximum amount of R 350 000. Ref: SARS>Individuals>Tax and Retirement

3. Currently, individuals are able to withdraw their retirement annuity when they turn 55 or when they financially emigrate and their emigration has been approved by the South African Revenue Service (“SARS”) and by the South African Reserve Bank (“SARB”). Ref: SARS>Individuals>Tax & Emigration