Navigating double taxation agreements in retirement planning.
Cross-border retirement planning raises difficult tax questions. This article unpacks how double taxation agreements (DTAs) shape the taxation of lump sums and annuities, and the steps advisors can take to help preserve clients’ retirement benefits.
For South Africans who have built their careers locally but now live abroad, the tax treatment of retirement fund benefits is one of the thorniest financial planning issues. Financial advisors are often asked to explain whether a retirement fund lump sum or annuity payment will be taxed in South Africa, in the client’s new country of residence, or, worst of all, in both.
Double taxation agreements (DTAs) are designed to prevent the same income being taxed in both countries, but the way they apply to retirement fund benefits is rarely straightforward. Financial advisors need to understand which country has taxing rights and navigate the SARS processes to ensure the correct tax outcome for clients.
Why DTAs matter for retirement benefits
Most countries tax residents on their worldwide income and tax non-residents on local-source income. Without relief, this can result in the same retirement benefit being taxed twice.
DTAs resolve the overlap by allocating taxing rights to one or both states, with the country of residence granting a credit if both tax the income. South Africa has signed many treaties, and they cover both annuities and lump sums. However, the detail varies, and that is where advisors need to pay close attention.
Interpreting treaty wording
Articles 17 or 18 of a DTA generally cover taxing rights for pensions, annuities, or lump sums.
‘Pensions’ include only periodic retirement fund payments that occur after reaching retirement age. The term ‘annuities’ is broader, and usually refers to periodic income often paid in return for a lump sum invested, such as an annuity from an insurer.
‘Other similar remuneration’ can include non-periodic payments such as retirement fund lump sums, whereas the ‘other income’ article (usually Articles 20 or 21) covers income not addressed elsewhere in the treaty.
Exploring the UK-SA DTA as an example
The UK–SA treaty illustrates the nuance. Article 17 grants sole taxing rights to the UK for annuity income, and retirement fund lump sums linked to past employment (such as pension, provident, or preservation fund benefits).
By contrast, lump sums from a retirement annuity fund that are not employment-related fall under Article 20 (the treaty’s ‘other income’ article), which sets out that both countries have taxing rights. This requires referring to Article 21 (Elimination of Double Taxation), which explains that the tax payable in South Africa shall be allowed as a credit against the tax payable in the UK.
The UK’s recent move to a pure residence-based tax system, effective from April 2025, adds another layer of complexity. Advisors need to be aware of such jurisdictional shifts, as they directly affect how DTAs are applied in practice.
Practical guidance for advisors
Helping emigrating clients manage retirement fund withdrawals involves more than legal interpretation.
Here are key considerations for advisors:
- Verify treaty coverage. Not all treaties grant full relief. Where no DTA exists, prepare clients for continued South African taxation on their retirement income, and explore foreign tax credit mechanisms in the new country.
- Ensure that tax emigration is formalised. Only clients who have ceased South African tax residency can claim DTA relief. Outstanding SARS obligations must be finalised before seeking a directive.
- Tailor withdrawal strategies. When weighing up options for clients who have reached the retirement age (i.e., taking a full lump sum withdrawal or receiving annuity payments), also consider the treaty provisions.
- Ensure coordination with administrators. Annuity administrators need the SARS directive timeously. Delays can mean PAYE is deducted unnecessarily.
- Prepare documentation early. Assist clients in obtaining the necessary documents for the RST01. Certificates of residence, employment letters, and proof of foreign tax can take weeks to source. Late preparation risks missed deadlines.
- Consider professional collaboration. Given the complexity of cross-border tax, don’t hesitate to consult a cross-border tax specialist for tricky cases. Collaborating with international tax experts or the client’s foreign tax advisor could lead to more comprehensive planning.
Staying ahead
The rules are evolving. SARS has extended the validity of directives for annuities to three years, while retirement system reforms, including the new ‘two-pot’ system, will impact future withdrawal options.
International changes, such as the UK’s abolition of the remittance basis tax regime, also have ripple effects.
Advisors who stay on top of these shifts, coordinate effectively with retirement fund/annuity administrators, and prepare clients for the realities of SARS processing times can add significant value to cross-border planning.
DTAs can be powerful tools to prevent double taxation, but they are not automatic. The correct application requires a blend of technical knowledge, regulatory process, and practical foresight.
By guiding clients through treaty provisions, SARS procedures, and withdrawal strategies, South African advisors can ensure that a larger portion of retirement fund benefits remains in clients’ hands and is not lost to unnecessary double tax.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.