First, congratulations on preserving your former employer’s retirement benefits. You have now avoided tax on retirement withdrawals, while retaining the option of withdrawing up to a single cash withdrawal before retirement age if, for example, you decide to return to your home country .

If you decide to retire in South Africa, preserving pension benefits, you will enjoy continued tax-free growth, which will provide you with a better long-term outcome in the form of an income of pension.

If you’re considering investing in rental property instead of saving in a retirement annuity (RA), you’ll need to think carefully about your long-term lifestyle goals. This would include the likelihood of returning to your home country for a few years or permanently during your working life, and where you would ultimately see yourself retiring given your current circumstances.

Investment property vs tax resident RA – SA

In the absence of a provident or retirement plan with your new employer, you must build up retirement savings on a private basis. This would typically involve contributing to an AR.

From a pure investment point of view: although investment property is a good idea in principle, it unfortunately does not replace a pension. The after-tax returns you might get in terms of net rental income and capital appreciation would not come close to the total returns of a retirement fund.

This is the result of the tax deduction that is available on contributions to retirement funds (i.e. pension and provident funds and RAs). Currently, all SA taxpayers can claim a tax deduction for pension fund contributions of up to 27.5% of taxable income, subject to a limit of R350,000.

For example, a taxpayer earning R40,000 per month, contributing 15% to a pension fund (i.e. R6,000), would save 36% tax on the contribution.

In other words, an investment of R6,000 each month would actually only cost R3,840.

If we compound the full contributions over time, plus capital growth, the difference between an RA and any other investment asset, including property, that has been funded with after-tax money is significant.

The more income you earn, the greater the tax advantage, especially for those paying tax at the top marginal tax rate of 45%.

The benefit of this tax saving is that it effectively frees up more cash flow for other investments, or in your case, to pay a bond payment on a rental property in addition to an RA, for example .

RA is a clear winner here – provided you use a flexible, commission-free option.

Exit SA: Withdrawal of pension benefits: non-residents

Your concern about accessing capital if you leave SA is valid.

In relation to exchange control changes effective March 1, 2021, former SA tax residents will need to provide proof that they have been tax residents in another country for an uninterrupted period of three years before they can withdraw the capital of their retirement funds. Although you may be ordinarily resident in another country, you are nevertheless currently an SA tax resident by virtue of living and working here (the physical presence test).

The time to access capital if you have an RA in place could be problematic if you were relying on the capital to buy a house overseas, for example.

Fortunately, however, this three-year rule would not apply to your former employer’s preservation fund. As long as you have not already made a single payment of the benefit, you could still access 100% of the capital of your preservation fund (retirement or provident fund) if you made a full payment before age 55 (or the age of retirement as specified in the fund regulations).

Withdrawing all your pension funds would be subject to tax, with the first R25,000 being tax free and the maximum of 36% applicable to the amount withdrawn above R990,000.

Retirement – ​​AS and non-residents

The amendment to the pension legislation of March 1, 2021 relates to the forced annuity of provident funds. In this context, provident funds will be subject to the same rule that already applies to RAs and pension funds in the sense that the lump-sum withdrawal in cash on retirement is limited to one third.

At retirement age, you would withdraw from your RA and retirement preservation fund. This would be more favorable from a pension tax perspective (up to R500,000 of the cash lump sum would be tax exempt), but you would need to consider the requirement to purchase a pension/annuity with the remaining capital, which would be paid to you in SA (and would be subject to income tax). This would be the case whether you retired here or elsewhere in the world – in the latter case the restricted access to capital can be alleviated to some extent by maximizing the drawdown on the life annuity.

However, if you were affiliated with a provident fund with your former employer, this legislative change would not apply to you. All pension fund or pension preservation benefits on February 28, 2021, as well as any future growth, will be considered “vested benefits”, meaning you could still take 100% in the form of cash capital retire if you choose to do so. This will also apply where a provident fund benefit has been transferred to a preservation fund. The retirement tax tables would be applied to the lump sum cash withdrawn.

However, these vested benefits would be reduced if you made a withdrawal from the benefit, either when you resigned from your former employer or from your preservation fund at a later stage. It is therefore essential that you do not consider this option if you are buying a property.

Leaving South Africa

If you are seriously considering leaving SA permanently in the not too distant future, it may not be worth creating an RA.

In addition to the three-year withdrawal limit, the decision to set up an RA should also consider your income, the number of years you would be contributing, and your goals, taking into account the intended income proportion. final capital versus your preservation fund benefit.

Once you have taken all of this into consideration, and particularly if your intention is not to stay in South Africa long term, you may prefer the investment property option.

However, although we generally always recommend that a deposit be refunded as quickly as possible, there are exceptions to this.

For an investment property, the debt actually works in your favor – the rental income would be taxable in your hands, minus the deductible expenses, which include the interest you pay to pay off the debt on the property. In this case, putting additional funds into the bond each month in the form of “pension savings” would reduce this deduction and thus increase your taxable income.

Instead, in this scenario, the contributions you would have made to your retirement fund during this period could potentially be invested overseas using your annual discretionary allowance, in anticipation of your return to your home country. origin.

Bear in mind that when leaving SA you will need to take into account the time needed to sell the property if you need to transfer the capital overseas, as well as selling costs and capital gains tax ​of sale.

Given the complexity of the issues and the need to look at your planning from a holistic perspective, you should consult an independent, certified financial planner for more detailed advice.