South Africans Working Abroad, Emigration and the Importance of Foreign Pensions
In a globalised world, people are more transient than ever, and the role that international pensions are playing to accumulate and safeguard wealth, whilst providing efficient income and ensuring succession, has risen significantly over the last 15 years.
This rise is in part due to the cross-border recognition of foreign pensions from a legislative perspective, the ability to transfer pensions cross border, and the beneficial tax treatment offered to immigrants who are holders of foreign pensions. However, demand is also driven by clients themselves who are seeking to internationalise more of their wealth, as opposed to moving their wealth from the country they left behind to their new country of residence.
A South African Perspective
From a South African perspective, clients fall into two groups, being the temporary migrant and the South African emigrant.
Temporary migrants can be defined as South Africans working outside of the Republic for more than 183 days in any tax year, of which 60 days must be continuous, but who have their families, social circles and primary residence in South Africa with the bulk of their expenses in Rand. For these individuals who are typically on contract, there is no group pension plan available, but contributions for services rendered abroad can be made to a personal pension plan.
Whilst such contributions do not attract tax relief, the current law in South Africa exempts the foreign pension receipts, provided the contributions were from services rendered abroad. In other words, the tax relief comes at the time when a benefit is paid out and not at the time when the contribution is made. Furthermore, the investment growth in the foreign personal pensions is not taxed, which brings it in line with a domestic pension or retirement annuity.
The big boon for these temporary migrants, apart from the tax exemption that they receive on the first R1.25 million of foreign earnings, is that 100% of the pension can be invested in global markets and hard currency. Moreover, benefit options can include access to the full fund if needed. With the added benefits of no need for a foreign will and the mitigation of complex cross-border tax issues and probate, foreign pensions should be a serious consideration for all South Africans working abroad on a temporary or short-term basis.
The second group is the South African emigrant. These are people who have decided to make their home outside of the Republic with no intention of returning (although many of them do return after a time) and who formally emigrate from South Africa. These people typically liquidate all their wealth in South Africa and move this wealth into accounts in their new home country.
This decision to move wealth to the new home country is often done in the absence of any real consideration as to the benefits of holding funds on an international basis and can be far less efficient than utilising international products. The reality is that many territories have very favourable tax regimes to attract emigrants, and these regimes focus on the efficient treatment of foreign pensions and pension income.
For those emigrating and going to live abroad, certain territories have very favourable legislation in terms of foreign pensions to specifically attract people, given that the level of taxation is highly favourable. Furthermore, foreign pensions play a significant role in providing passive income or establishing an individual’s wealth for the purposes of visa and residency requirements.
If we consider the treatment of foreign pensions in Europe, Cyprus provides a favourable tax regime for foreign pension income and retirees can choose to have their foreign pension taxed at a flat rate of 5%, whereas Malta’s Global Residence Programme provides a flat tax rate of 15% on remitted foreign pension income.
Portugal’s Non-Habitual Resident (NHR) regime offers new residents a 15% inclusion rate on foreign pension income, taxed at your marginal rate, which typically results in a real rate of tax of between 5% and 9%. Spain taxes annuity income, which includes foreign annuities, with effective rates as low as 2.5%, depending on the annuity terms. Greece and Italy offer a flat tax rate of 7% on foreign pension income and Ireland offers 0% on foreign pension income that is not remitted into Ireland, provided the individual resident in Ireland is non-domicile.
Looking further afield to Southeast Asia and Australasian countries such as Singapore and Malaysia, foreign pension income is exempt, whereas Thailand taxes pensions according to the visa held. This can result in a tax rate of 0%, with Thailand becoming more popular with South Africans.
The more traditional emigration corridors of Australia and New Zealand also have specific legislation. These differ between countries, but include systems such as tax exclusion for foreign pension income of up to four years, low income tax inclusion rates for foreign pensions, tax free roll-up and no tax on certain lump sums.
Pension Contributions and Transfers
For those looking to leave South Africa, they can consolidate part of their wealth in a foreign pension in preparation for their move to their new home country. Where such wealth is still in the Republic, individuals can utilise their discretionary and/or investment exchange control allowances to fund the foreign pension.
Furthermore, where a South African retirement fund is held, this does not need to be cashed in and it may prove to be more beneficial to transfer the local fund to a foreign fund. The South African Pension Fund Act 1956 makes specific provision for transfers, and the South African Financial Sector Conduct Authority (FSCA) issued Conduct Standard 1 of 2019, which deals with the requirements and procedures for transferring pension fund assets abroad. However, transfers can only be considered once the individual is no longer a South African Tax resident and has a Tax Compliance Status (TCS) in respect of ’emigration’ from the South African Revenue Service (SARS).
For the South African who is working abroad, but who is resident in South Africa, the use of a foreign pension to accumulate wealth in hard currency, which is invested globally and can provide a hard currency income in South Africa in retirement, makes a lot of sense, particularly when combined with the tax treatment of foreign pensions accumulated under such conditions.
Conclusion
In conclusion, pensions are often overlooked because they are widely considered from a domestic perspective; however, legislation in most countries, including South Africa, specifically caters for foreign pensions, which can secure a wide range of outcomes for clients.
These outcomes include tax efficiency, securing residency rights, mitigating cross-border taxation, the elimination of the need for foreign wills, and unrestrained access to global investment and currency markets, all within a highly protected, regulated and international environment.
For those who are either working abroad, in the process of emigrating, or who have already emigrated, not considering the use of a foreign pension as part of a broader financial plan may close down a world of opportunity without them even realising it. However, clients should seek financial advice from practitioners who are specialised in dealing with cross-border advice and only consider foreign pension providers that are regulated in South Africa.