What happens if you emigrate after investing in a living annuity?

A living annuity is a retirement investment vehicle that allows you to withdraw a regular income while keeping the capital invested, allowing it to grow and compound over time. As many retirees choose to emigrate for various reasons, often related to the economy, or to be closer to family and grandchildren who may live overseas, an important question to consider is what happens to your living annuity when you emigrate. This article will look at how living annuities are handled during emigration and how to plan and educate yourself on related issues such as handling payments, fees and taxes. For more on living annuities, check out our living annuity FAQ page. 

 Understanding the basics of living annuities in South Africa 

Living annuities are flexible investment products that allow you to select a drawdown rate of between 2.5% and 17.5% to give yourself an income in retirement. This can be amended annually to cater for your changing needs, financial situation and market conditions. You also have flexibility and control in terms of the underlying investment portfolios that you select. You can diversify your funds and choose a mix of asset classes, such as equities, bonds, real estate, and cash, as well as some offshore exposure (up to 100% offshore, in fact, with 10X Investments) through your fund selection.  

Your selections would depend on your risk tolerance and time horizons. This presents a lot of flexibility compared to life annuities, which allow for less control, and where you can expect a fixed income for life and no flexibility in terms of portfolio selection or changing your drawdown rates after your initial selection. Living annuities are tax-deferred, meaning there is no tax while they are invested, but tax is applied when you withdraw.  

What does ‘emigration’ actually mean for financial purposes? 

When speaking about ‘emigration’, there can be different definitions, so it is important to be clear on exactly what is being referred to.  

We have ‘physical emigration’ when you move abroad permanently. We also have ‘tax emigration’, which means you are no longer a tax resident in South Africa. This is when you formally notify SARS that you are no longer a tax resident in South Africa, which was previously termed ‘financial emigration’. The focus here will be on ‘tax emigration’ when you formally cease to be a tax resident in South Africa (as physical emigration usually implies tax emigration). 

In South Africa, there are two tests that SARS uses to determine whether you’re a tax resident or not. The Ordinary Test, which looks at whether or not South Africa is still your home, and the Physical Presence Test, which looks at the time that is spent in South Africa in terms of the number of days. If you end your tax residency in South Africa, you then become a non-resident for tax purposes. This may then affect your living annuity and how it is taxed. 

Can you take your living annuity out of South Africa after emigration? 

If you do decide to emigrate from South Africa, you are not able to move your living annuity out of South Africa or cash it in. The living annuity needs to stay in the South African financial system, so the capital will need to remain in South Africa. You are, however, able to receive your income payments into a foreign bank account. 

Unlike some other retirement products, living annuities have never been eligible for full withdrawal upon emigration, either before or after the 2021 rule changes. Before 2021, financial emigration allowed individuals to access their retirement annuities in full after ceasing tax residency, but this has never applied to living annuities. 

Tax implications for non-resident living annuity holders 

Tax in South Africa Even if you have emigrated, income from your South African living annuity may be taxed in South Africa, depending on whether a Double Taxation Agreement (DTA) applies. In cases where South Africa retains tax rights, your annuity service provider will withhold South African income tax before paying you your income. You will be taxed according to the normal South African tax tables. Tax in Your New Country Many countries tax worldwide income, which means that you might be taxed twice on your living annuity income. To determine whether or not you will be taxed on your income depends on:  

• Whether or not there is a Double Taxation Agreement between your new country and South Africa. 
• Your new country's tax rules. Some countries exclude certain types of pension income from being taxed. 

 For example:  

• United Kingdom: According to the UK/South Africa Double Taxation Agreement, South Africa has the right to tax the living annuity income. The United Kingdom will not tax this income. 
• Australia: Australia taxes worldwide income, but under the South Africa-Australia Double Taxation Agreement, only Australia has the right to tax the income, meaning South Africa should not withhold tax. 

Receiving annuity income abroad 

Once you have become a non-tax resident in South Africa, you will need to organise how you will receive your living annuity income. You can either receive funds in your South African bank account, if you decide to keep one open, or you can request to receive the funds in your foreign bank account.   

To transfer funds abroad, you must comply with South African exchange control regulations. This usually involves obtaining tax clearance from SARS and following the process set by the South African Reserve Bank (SARB). Many retirees keep a South African bank account open to simplify transactions, but this may require maintaining local tax compliance.  

Different financial institutions may have varying processing times for international payments. The transfers may take a few days to reach your bank account after all compliance checks related to international payments have been completed. Some retirees set up scheduled transfers to mitigate timing risks and currency fluctuations.  

You will need to supply your service provider with your new banking details if you are changing your income payments to a foreign bank account as well as notify them of your non-resident tax status. It’s important to be aware of the international bank charges that may be levied on your income payment and also exchange rate fluctuations, which may impact the amount you receive in your bank account. The transfers may take a few days to reach your bank account after all compliance checks related to international payments have been completed. 

What happens to your living annuity in the event of your death as a non-resident? 

A living annuity is never subject to South African estate duty, but if no beneficiary is nominated, the funds may revert to the estate for administrative distribution, which can cause delays and additional costs. Beneficiaries can choose to receive the funds as a lump sum (which will be taxed in South Africa) or continue with a living annuity in their own name.  If the beneficiary does not reside in South Africa, they will need to check the rules surrounding:  

• How South African tax applies to both lump sum amounts and income payments.  
• How their home country deals with tax on inheritance and tax on income. 
• Whether or not a Double Taxation Agreement applies to avoid Double Taxation.  

Living annuity fees for non-residents   

It’s important to be aware of the fees that you are being charged on your living annuity. The higher the fees, the the greater the chance your capital will be depleted. If you are a non-resident, you may be charged higher admin fees by your service provider for offshore payments. It’s a wise idea to request an Effective Annual Cost (EAC) from your service provider. This shows you the total fees and costs that you are being charged over a one-year period.   

You would want to aim for investments that have a low EAC, as a high EAC has a negative effect on your investment returns, and this would result in less income and less money to reinvest. It’s important to look at the EAC when comparing two investments. This will provide you with a more comprehensive comparison to help you choose the more cost-effective and sustainable investment. Here is a useful link to an EAC calculator so that you can calculate the costs involved with your living annuity.  

Let’s look at an example of the impact that high fees (3%) versus low fees (1%) can have on your capital. Imagine you invest R100,000 and receive an annual return of 12% over 30 years.  Let’s compare two scenarios: Fees of 3% vs Fees of 1%.  

After adjusting for 6% inflation, here’s what your investment would be worth in today’s money: 

With 1% fees, the real investment value is R398,578. 

With 3% fees, the real investment value is R231,004. 

Both investments start at R100,000 and earn the same 12% return; the 2% difference in fees leads to a substantial 42% loss in real value over 30 years. This highlights why minimising fees is vital for long-term investing. 

10x charges low fees, often less than 1%. 10X also has no hidden fees. You won’t be charged any exit penalties, early withdrawal fees or anything else unexpected. As a non-resident investor with 10X Investments, you will not incur any additional fees compared to a resident investor, but you may need to consider potential foreign exchange fees depending on the currency you use to invest, and you should always check with a 10X consultant directly for the most accurate information regarding your exact situation.   

Should you convert to a life annuity after emigrating? 

Switching from a living annuity to a life annuity after emigration may not always be possible. While there is no legal restriction from SARS or the FSCA, some insurance providers impose their own restrictions on converting a living annuity once an individual ceases tax residency. If you are considering a life annuity, it is advisable to make this decision before tax emigration to ensure you have access to the full range of options. 

A life annuity provides a guaranteed income for life, which can be attractive for retirees seeking income certainty and avoiding the risks of market fluctuations. However, it lacks flexibility. Unlike a living annuity, where the capital remains invested and can be inherited by beneficiaries, a life annuity usually does not allow for capital transfer upon death unless specific provisions, such as a joint-life annuity or guarantee period, are chosen upfront. 

Living annuities and emigration conclusion 

Careful planning is key to setting yourself up for retirement, especially if you are considering emigrating. Even if you emigrate, your living annuity must remain in South Africa, meaning you need to plan for how you will access and manage your retirement income from abroad. 

Key considerations include understanding the tax treatment of your annuity in both South Africa and your new country of residence, ensuring you comply with exchange control regulations for international transfers, and managing currency fluctuations that could impact your income. You should also compare service providers to ensure that you are not overpaying on fees, as higher costs can erode your capital over time. 

This can all be a lot to navigate, so speak to one of the experienced investment consultants at 10X investments to discuss your options. Get in touch today.