06 - Retirement Planning

Question 1

What types of annuities are available for retirement?

Answer 1

Compulsory Annuities

• Compulsory annuities are purchased with funds from pension, provident, retirement annuity, pension preservation or provident preservation funds and include:
  
  • a) Conventional/traditional annuities: guaranteed income.
  • b) Living annuities: subject to the investment performance of underlying assets, amount of drawdown taken by the annuitant.

Voluntary annuities

• Voluntary annuities are purchased with voluntary (non-retirement fund) funds.
• Annuity consideration may be determined with reference to the net investment amount i.e. less costs.
  
  • Thus, where R100 000 was invested and costs were 5,5%, the annuity will be calculated on the net amount of R94 500.

Question 2

What are conventional/traditional annuities?

Answer 2

Conventional/Traditional Annuities

• Single Life
  
  • Only on the life of the annuitant.
  • Payment will cease when annuitant dies.
• Guaranteed Term
  
  • Guaranteed to pay for a certain term from inception, even if annuitant dies before the time (annuity will pay for the remained of the period).
• Escalation
  
  • Annuity will escalate from year to year on percentage selected by annuitant.
• Joint and Survivorship
  
  • Annuity pays till death of annuitant where after the full annuity or a portion thereof is paid till the death of another person (usually the spouse of the deceased).
• Capital Preservation
  
  • When the annuitant dies, an amount equal to the capital invested in the annuity pays out – this is essentially funded through a life policy taken out on life of annuitant.
  • Proceeds of life policy pays out income tax free.

Question 3

SWOT Analysis on Conventional Annuities

Answer 3

Strengths

• Income Guaranteed for Life
• Investment Market Risk
• No Longevity Risk

Weaknesses

• Generally no upside market potential
• Death Benefits Limited (Joint Life, Guaranteed Term, CPO)

Opportunities

• With-Profit/Bonus Escalation
• Option provides exposure to upside of investment markets with no downside risks
• Composite Annuities

Threats

• Living Annuities
  
  • Initial and ongoing Advice Fees on Living Annuities but only Initial Advice Fees on Traditional Annuities
• Improving Life Expectancies influence annuity rates

Question 4

What are living annuities?

Answer 4

Overview

• Living annuities are compulsory annuities available to retiring members of Pension, RA and Provident funds (where the rules of the fund allow for this). It is by design intended to last for the remainder of the annuitant’s life.
• It is regulated by two practice notes GN18 and GN290. As well as the ASISA code on living annuities and the definition of living annuities in the Income Tax Act.
  
  • GN18 provides for the purchase of annuities by funds on behalf of retiring members. It provides that the annuity must be compulsory, non-commutable and payable for the lifetime of the retiring member.
• Living annuities are only subject to Reg 28 if it is a fund owned living annuity (owned by retirement fund) – not applicable to member owned.

Legal definition

Defined as follows in Income Tax Act:

Living annuity is a right of a member / former member of a pension, provident, preservation fund or a RA, or his dependant/nominee, to an annuity purchased from a living annuity provider at retirement/death in respect of which –

• (a) The value of the Living annuity is determined by reference to the value of the assets which are specified in the annuity agreement and held for these purposes;
• (b) The annuity is determined in accordance with a method/formula prescribed by the Minister;
• (c) The value of assets may be paid in a lump sum if at any time less than amount prescribed by Minister;
• (d) The amount of the Living Annuity is not guaranteed by the provider;
• (e) On the death of the member, the value of the assets may be paid to the dependant or nominee as an annuity or a lump sum

Question 5

What does GN290 say about living annuities?

Answer 5

GN 290 (March 2009) describes the guidelines for and parameters within which living annuities may be paid.

The salient provisions are:

• Income levels of minimum 2.5% and maximum 17.5% on annual capital value
  
  • The minimum level may be removed in the future – proposed
• Income levels of minimum 5% and maximum 20% if living annuity concluded before 21 Feb 2007, provided that these %’s may be adjusted to the 2.5% - 17.5% levels if annuitant agrees.
• Must at all times produce a life annuity
• Annuity benefits must be renewed on an annual basis (on anniversary date).
  
  • The revised fund value must be used to calculate minimum and maximum levels of income payable.
  • Thus the annuitant can decide to adjust the drawdown rate (between 2.5% and 17.5%, or 5% and 20%) on the anniversary date.

Question 6

Are there any restrictions on living annuity contracts that are transferred?

From one insurer to another

From a retirement fund to an insurer

Answer 6

Where living annuity contracts are transferred:

• from one insurer to another in terms of Directive 135 and 135A issued by the Registrar of Long-Term Insurance,
• or from a retirement fund to an insurer in terms of section 14 of the Pension Funds Act:
• a) The frequency of payment may not be changed;
• b) The annuity may not be split so that more than one annuity is payable subsequent to the transfer.

Question 7

What are the commutation restrictions of a living annuity?

Answer 7

Living annuity may be commuted as a lump sum if:

• a) The value of the underlying assets of the living annuity falls below R75 000 if no portion of the retirement interest was commuted as a lump sum when the living annuity was purchased; or
• b )The value of the underlying assets of the living annuity falls below R50 000 if any portion of the retirement interest was commuted as a lump sum when the living annuity was purchased.

Other

• Living annuity may also be commuted as a lump sum when the annuitant dies (see discussion below)
• Where living annuity is commuted by an annuitant as a lump sum it will be taxed in terms of the retirement table applicable to lump sums.
• Where the annuitant dies and the beneficiary decides to commute the living annuity as a lump sum, it will be taxed in the hands of the deceased in terms of the retirement table applicable to lump sums.

Question 8

Who can provide living annuities and how will it be taxed?

Answer 8

Living annuity provider:

• (a) A bank;
• (b) A collective investment scheme;
• (c) A long-term insurer;
• (d) A pension fund organisation;
• (e) The national sphere of government

The above confirms that a living annuity qualifies as an annuity and is thus taxable (part of gross income) as the references to annuity includes a living annuity.

In response to the SARS v Higgo Case (Cape High Court 2006) where a Living Annuity was viewed as capital and not taxable.

Question 9

What does ASISA’s Code of Conduct say about Living Annuities?

Answer 9

ASISA Code of Conduct on Living Annuities

• Provides industry standards to make sure living annuities are marketed and administered responsibly.
• Minimum disclosures at point of sale (explaining LA’s).
• Disclosure that LA’s are not transferable and convertible.
• Member offices must communicate on annual basis the appropriate drawdown level as determined in the code.

Question 10

What happens on the death of an annuitant i.r.o. living annuities?

Answer 10

• A beneficiary may be nominated to receive the benefits on the death of the annuitant.
• If no beneficiary is nominated, the benefits will be paid to the estate of the deceased annuitant as a lump sum.
• As from 1 March 2012, the nominated beneficiary can take the benefits in the form of a lump sum, an annuity (“living annuity”) or a combination of the two.

Question 11

What are the estate duty implication i.r.o. living annuities?

Answer 11

• a) On the death of the member or former member (or on the death of the nominee who had chosen to continue with the living annuity) the value of the assets in the living annuity, whether taken as a lump sum or not, is not included in the estate of the deceased for estate duty purposes (however see discussion regarding disallowed contributions and estate duty below).
• b) If the nominee however commuted the living annuity into cash it becomes “voluntary money” and will attract estate duty later in his/her estate

Question 12

What are the income tax implication on death i.r.o. living annuities?

Answer 12

• a) If the beneficiary receives an income – the beneficiary will be taxed on income at marginal rate.
• b) If the beneficiary receives a lump sum – is deemed to have accrued to the annuitant immediately prior to death, therefore taxed with other retirement lump sum benefits (i.e. remember aggregation) in the hands of the deceased in terms of the lump sum tax table applicable to death.

Is Sec 37C (prescribing the distribution of the benefit between beneficiaries and/or dependants) applicable?

• Only if it is a fund owned living annuity (annuity owned by a retirement fund).
• If it is a member owned living annuity Sec 37C will not be applicable – nominated beneficiary will be paid irrespective whether there are (other) dependants.

Question 13

What are the important resources for understanding living annuities?

Answer 13

• Income Tax Act
• ASISA code on Living Annuities
• GN18, GN19 and GN290
• Directive 135

Question 14

SWOT analysis of living annuities?

Answer 14

Strengths

• Income flexibility
• Transparency
• Investment choice
• Bequest control

Weaknesses

• Income not Guaranteed
• Investment Market Risks
• No Longevity Protection
• Conservative portfolios

Opportunities

• Guaranteed Funds in LA
• LA with longevity protection
• Composite Annuities
• Hybrid Annuities

Threats

• Legislation
• Decreasing Expectations of Real Returns on Growth Assets
• Improving Life Expectancies

Question 15

Who should purchase living annuities?

Answer 15

Clients who:

• want to be able to alter the income that they draw annually.
• are prepared to take the risk that poor market performance will negatively impact on future income from their investment.
• want to draw a variable income from their retirement funds, with any remaining fund benefits going to their beneficiaries on death.
• are prepared to take the risk that their retirement capital may reduce, and therefore their income may be insufficient, especially if they draw too much income early on.
• wish to have the ability to change the investments funds they hold.
• have reason to believe that their life expectancy will be short due to poor health or immediate family history.

Question 16

What are the income tax implications of compulsory annuities?

Answer 16

Fully taxable in the hands of the annuitant, but possible exemption in terms of Sec 10C

Question 17

What does Sec10C say in terms of exemptions in respect of taxable annuity income?

Answer 17

• Where a member of a pension, provident or retirement annuity fund retires from such fund, and there are contributions that were previously disallowed to the member as a deduction for income tax purposes, these disallowed contributions will be deductible from the lump sum taken on retirement.
• Contributions to a pension, provident and retirement annuity fund in excess of the amount allowed as a deduction from the lump sum are exempt from a compulsory annuity accruing to the member from 1 March 2014.
• In this regard it must be borne in mind that deductions not allowed in respect of contributions made and not accounted for in calculating the tax on the lump sum taken on retirement (or withdrawal from the fund before retirement) will only be exempt against a compulsory annuity taken by the client, and not against any other income accruing to the client.

Important Aspects:

• One must also take cognisance of the fact that this exemption is only available to the member of the fund that made the contributions.
  
  • Where beneficiaries of a living annuity decide to continue receiving an annuity after the death of the original annuitant (i.e. the member of the fund that had retired), this exemption will not be available to these subsequent annuitants.
• A compulsory annuity is defined as the remainder of the retirement interest of a person payable as an annuity contemplated in the definition of a pension fund, pension preservation fund and a retirement annuity fund.
  
  • It thus does not include compulsory annuities purchased through funds (retirement interest) from a provident fund or provident preservation fund (even though the rules of a provident fund may make provision for the option of using all or a portion of the retirement interest to purchase an annuity).
• A person would, however, be able to exempt non-deductible contributions by members of provident funds against annuity income of pension funds, retirement annuity funds and pension preservation funds that members of such provident funds may also have belonged to, it will not be deductible from a compulsory annuity obtained through the retirement interest in provident funds
• In terms of the provisions of Sec 10(C) contributions to pension, provident and retirement annuity funds that were disallowed as deductions by fund members for income tax purposes first have to be set off against lump sums taken by such members, where after it will be exempted against compulsory annuities (as defined in this section).
• ​Members will thus not be allowed to exercise a choice to have all disallowed contributions exempted from compulsory annuity income where they also elect to take a portion of the retirement interest as a lump sum, thus making full use of the 0% tax rate on the first R500 000 in respect of lump sums.
• This could in certain instances encourage members to take larger lump sum payments on retirement to ensure the maximum tax benefit.

Question 18

Voluntary Annuities Exemptions

Answer 18

Section 10A of the Income Tax Act

CAPITAL PORTION EXEMPT if:

1. Agreement between insurer and natural person; and
2. Annuity payable until death of the annuitant or the expiry of a specified term; and
3. Annuity payable to the purchaser or his/her surviving spouse; and
4. Must not be an annuity payable by the insurer under the rules of a pension, provident or RA fund.

Question 19

How is the capital portion of a voluntary annuity calculated?

Answer 19

Calculating capital portion :

• Y = A / B x C
  
  • Y = Capital portion
  • A = Cash consideration (paid for annuity)
  • B = Payments made to annuitant
  • C = Annuity

Question 20

How are commutations of voluntary annuities calculated?

Answer 20

Commutation (s10A(3)(c))

The commuted value is taxable, the exempted amount:

• X = A – D where
• X = Exempt amount
• A = The amount of the total cash consideration given by purchaser
• D = The sum of the capital elements of all annuity amounts payable ito the annuity contract prior commutation

Question 21

How are retirement benefits affected by insolvency?

Answer 21

Insolvency: Section 37A – Pension Funds Act

No benefit provided under a pension fund may be:

• Reduced
• Transferred
• Ceded
• Pledged or hypothecated
• Attached under a judgment or order of court
• Not more than R3 000 pa to be taken into account for section 65 determination of judgment ito debtor’s financial position.
• Not protected in respect of amounts owing under the Income Tax Act and the Maintenance Act.
  
  • Maintenance deducted will be taxed at marginal rates in hands of member and not as a lump sum see Sec 7(11) of Income Tax Act read with SARS Interpretation Note 89 dated 1 March 2016.

Section 37B - Pension Funds Act

• If the estate, of any person who is entitled to a benefit payable in terms the rules of a pension, provident fund or RA, is sequestrated, such benefit is deemed not to be part of the assets of the insolvent estate.
• This is however subject to the provisions of Sec 37A & Sec 37D.

Question 22

Death Benefits

Answer 22

Section 37C – After 1 Nov 2008

• Financial Services Laws General Amendment Act amended s37C
• Benefits upon death of member may now be paid in following manner:
  
  • Directly to a dependant or nominee;
  • Payment to a trust, if nominated by a member, major beneficiary or guardian of a beneficiary;
  • Payment to a beneficiary fund
• After 1 Nov 2008, the trustees of a retirement fund may no longer pay to a trust of their own accord.

Beneficiary Fund

• What is a “Beneficiary fund”:
  
  • “any association of persons or business carried on under a scheme or arrangement established with the object of receiving, administering, investing and paying benefits, referred to in section 37C on behalf of beneficiaries, payable on the death of more than one member of one or more pension funds”
• The Beneficiary Fund needs to be registered i.t.o the Financial Services Laws General Amendment Act
• Income payable to beneficiaries of a Beneficiary Fund is not taxable – exempt in terms of Sec 10(gE) of Income Tax Act (As per the Taxation Laws Amendment Act 2009)

Question 23

What deductions are allowed from retirement benefits?

Answer 23

Section 37D: A retirement fund may deduct the following from the fund value before payment:

• (a) A loan granted to a member in respect of immovable property in certain circumstances;
• (b) Any amount due by a member to his employer i.r.io. Damage caused to employer through theft, dishonesty, fraud, misconduct where member has admitted liability in writing or judgment has been obtained in a court
• (c) Any amount which the fund has paid in respect of member’s subscription to a Medical Aid or premium to a long-term insurer
• (d) Payments in terms of divorce order
• (e) Maintenance order
• (f) Employees’ tax required to be deducted or withheld in terms of the Fourth Schedule to the Income Tax Act

Question 24

What factors are taken into account i.r.o pension interest and divorce?

Answer 24

• Marital regime
• Legislation
• Income Tax
• Divorce Orders
• GEPF
• Compulsory annuities payable after retirement

Question 25

Pension Interest and Divorce – Marital regime

Answer 25

Marriages in community of property

• The pension interests of the spouses will form part of the joint estate and the non-member spouse will be entitled to 50% of the pension interest of the member at the date of divorce.

Marriages out of community of property with accrual

• The pension interests will form part of the estates of the spouses and will be taken into account for the accrual calculation.

Marriages out of community property without accrual before 1/11/84

• The spouses retain their own separate estates and there is no sharing of assets at divorce, unless a court of law orders a redistribution of assets in terms of Section 7(3) of the Divorce Act.
• A pension interest forms part of the spouse’s estate and will form part of the assets if redistribution is ordered.
• The parties may also agree to share the pension interest.

Marriages out of community of property without accrual after 1/11/84

• The spouses retain their own separate estates and there is no sharing of assets at divorce, unless a court of law orders a redistribution of assets in terms of Section 7(3) of the Divorce Act.
• Although a court can order redistribution of assets, pension interests are not considered as assets in the estate for this marital regime.
• Any share in the pension interest will have to take place by mutual consent.

Common law relationships

• Parties living together, ie co-habitees who have not had their relationships/unions registered i.t.o the Marriage Act or Civil Union Act - cannot share in the pension assets/interest of their partner upon termination (other than death) of the relationship.
• Upon death, the co-habitee may be seen as a dependant or having a permanent union with the deceased partner and may benefit i.t.o section 37C of Pension Funds Act.

Question 26

Pension Interest and Divorce – Legislation

Answer 26

• Divorce Act 70 of 1979 * - section 1 & 7
• Pension Funds Act 24 of 1956 * - section 37D
• Pension Funds Amendment Act 11 of 2007
• Financial Services Laws General Amendment Act 22 of 2008
• Income Tax Act 58 of 1961 * – Second Schedule

*With amendments

Question 27

Pension Interest and Divorce – Legislation

Divorce Act 70 of 1979

Answer 27

“Pension Interest” is defined as follows:

Pension & Provident Fund

• The benefits to which a member would have been entitled to in terms of the rules of the fund if his/her membership had terminated, due to resignation, at the date of the divorce.

Preservation Funds

• Previously not included, but section 37(D)(6) of the Pension Funds Act now reads: “the portion of the pension interest of a member of a preservation fund that is assigned to a non-member”

Retirement Annuity

• The sum of the member’s contributions to the fund up to the date of divorce plus simple annual interest as provided for in the Prescribed Rate of Interest Act.
• This is dependant on date of divorce:
  
  • 1) Up to 31 July 2014: 15.5%
  • 2) From 1 August 2014 to 29 February 2016: 9%
  • 3) On 8 January 2016 the Prescribed Rate of interest Act was amended to the following effect: The rate of interest is the repurchase rate as determined from time to time by the South African Reserve Bank, plus 3,5 percent per annum. This interest rate is effective from the first day of the second month following the month in which the repurchase rate is determined by the South African Reserve Bank. The effect of this:
    
    • Date of Divorce: From 1 March 2016 to 30 April 2016: interest rate which is applicable is 10.25% per annum
    • Date of Divorce: From 1 May 2016 to effective date: interest rate which is applicable is10.50% per annum

Question 28

Pension Interest and Divorce – Legislation

Pension Funds Amendment Act 11 of 2007

Answer 28

Introduced the “clean break” approach whereby payment may be made to the “non-member spouse” immediately after divorce.

Section 37D(1)(d)(i):

“A registered fund may -

• (d)(i) deduct from a member’s benefit or minimum individual reserve any amount assigned from his/her pension interest to a non-member spouse in terms of a valid court order;”

Section 37D (1)(e):

“for the purposes of section 7(8)(a) of the Divorce Act, the pension benefit referred to in that section is deemed to accrue to the member on the date of the court order: Provided that-

• (i) such deduction shall be effected by the pension fund named in the order upon receipt of the order;
• (ii) such deduction shall have the effect of reducing the accrued benefit at the date of such deduction;
• (iii) the non-member spouse shall have the option to elect that the assigned amount be paid directly to him/her, or that it be transferred to an approved pension fund on his /her behalf, and such transfer or payment must take place within 60 days of such election having been exercised;
• (iv) the non-member spouse shall not acquire the rights of a member or beneficiary in relation to the pension fund; and
• (v) the non-member spouse shall be entitled to the accrual of interest on the assigned amount at fund return from the expiry of the period referred to in subparagraph (iii) until payment or transfer thereof, but not to any other interest or growth”

(This section was removed in 2008 but confirmed with other amendments)

Question 29

Pension Interest and Divorce – Legislation

Pension Funds Amendment Act 11 of 2007

Answer 29

• The amendment in the Pension Funds Amendment Act did not clearly set out the retrospective application and it was generally considered to apply to divorce orders after 13 Sep 2007, being the effective date of the Act.
• The above was challenged in Cockcraft vs. Mine Employees Pension Fund where the Pension Fund Adjudicator indicated that it was her opinion that the intention of the legislature was to make the amendment retrospective.
• The Financial Services Laws General Amendment Act confirmed the position:
  
  • All pension interests awarded i.t.o divorce orders issued prior to 13 Sep 2007 are deemed to accrue on that date.
  • The “clean break” approach was therefore now effectively applied to all divorce orders.
  • (Confirmed in section 37D(1)(a) of Pension Funds Act)

37D Amendments

The Act also amended section 37D of the Pension Funds Act further :

• (i) The fund must ask the non-member spouse how the benefit is to be paid, within 45 days of receiving the divorce order;
• (ii) The non-member spouse must notify the fund within 120 days whether the amount must be paid in cash or transferred to another retirement fund;
• (iii) The fund must give effect to this election within 60 days;
• (iv) Interest is payable on the amount from the expiry of the 120 day election period;
• (v) Where the non-member spouse does not make the election within the 120 days, the fund must make the payment in cash within 30 days thereafter.
• (Incorporated in section 37D(4)(a) and (b) of Pension Funds Act)

Question 30

Pension Interest and Divorce – Income Tax

Answer 30

Divorce Orders PRIOR to 13 Sep 2007

• No tax will be payable for divorce orders granted prior to 13 September 2007, irrespective of the date of payment

Divorce Orders AFTER to 13 Sep 2007

• The non-member spouse will be responsible for the tax, even if the claim by the non-member spouse is after the date of the member’s withdrawal from the fund.
• The withdrawal table will be applied to calculate the tax payable by the non-member.
• The non-member may transfer to an approved retirement fund and such a transfer is tax-free – see tax-free transfers in lecture 1.
• Upon retirement or withdrawal from retirement funds by the non-member, the taxed divorce award would be aggregated with other lump sums.

Question 31

Pension Interest and Divorce – Divorce Orders

Answer 31

The Divorce Order must contain :

(i) A specific reference to “pension interest” must be made as defined in the Divorce Act.

• If the fund is a preservation fund the order must read “pension interest” as defined in section 37D(6) of Pension Funds Act.
• The following will generally not be binding: “pension fund”, “pension benefits”, “joint estate”, “member’s interest in the fund” or the “proceeds of the policy”.

(ii) The name of the Fund.

• Where the fund is not named, it must at least be possible to determine from the wording of the order which fund the parties had in mind.
• For example, the “fund of the member-spouse’ employer” would be ascertainable but the “Sanlam pension fund” is not ascertainable since financial institutions operate several funds.\

(iii) A specified percentage or amount of the pension interest must be provided.

• It must be clear from the order how much of the member’s pension interest has been assigned to the non-member spouse.
• The following will generally not be binding:
  
  • An order which stipulates that the pension interest must be divided equally will not be considered binding as it does not indicate that 50% of the pension interest has been awarded to the non-member spouse.
  • “Any debts incurred by the non-member spouse after the date of divorce must be deducted from the pension interest” – compliance with a further condition of one of the parties cannot be enforced against the pension interest of a member.

Question 32

Pension Interest and Divorce - GEPF

Answer 32

Background

• Government Employees generally belong to the Government Employees Pension Fund (GEPF).
• The GEPF is not governed by the Pension Funds Act but by the GEPF Law of 1996.
• The GEPF law determines that benefits are only payable on termination of service by the contributing member by means of retirement, medical retirement, resignation, discharge or death.
• The “clean break” approach WAS thus not applicable to members of the GEPF.
• Wiese v GEPF (1 July 2011) (Western Cape High Court) declared the Govt Employees Pension Law unconstitutional insofar as it fails to give former spouses of GEPF members the same rights as those afforded to former spouses of members of funds subject to regulation in terms of the PFA and GEP Law needs to be changed – allow Parliament 12 months to change.

Post 14 Dec 2011

• GEPF rules were amended with effect 14 Dec 2011
• The amendment had potential problems as it did not mirror the private sector funds and National Treasury proposed that it should.
• In terms of the amendment the divorce order accrued to the member with tax implications for the member, unlike the private sector funds where it accrued to the non-member.
• However with 1 March 2012 the regime was changed as follows:
  
  • Divorce orders issued before 13 September 2007: neither the member nor the non-member is taxed; irrespective of when the non-member claims payment. (Similar to the private sector-funds)
  • Divorce orders issued on/after 13 September 2007: the non-member is taxed, irrespective of when he/she claims payment of the award. (Similar to the private-sector funds).
  • The member’s tax-free portion accruing prior to 1 March 1998, will be apportioned to such portion awarded to the non-member.

Question 33

Calculating the pre 1998 portion of the divorce award

Answer 33

X = a/b x c

Where:

• x = potential taxable lump sum
• a = number of completed years of service post 1998 to date award paid out
• b = total completed years of service to date award paid out
• c = value of award

Question 34

Pension Interest and Divorce – Compulsory annuities

Can compulsory annuities payable to clients after retirement from a retirement fund be part of a divorce settlement?

Answer 34

Can compulsory annuities payable to clients after retirement from a retirement fund be part of a divorce settlement?

• Section 37A of the Pension Funds Act:
  
  • “…..no benefit provided for in the rules of a registered fund (including an annuity purchased or to be purchased by the said fund from an insurer for a member), or right to such benefit, or right in respect of contributions made by or on behalf of a member,
  • shall, notwithstanding anything to the contrary contained in the rules of the fund, be capable of being reduced, transferred or otherwise ceded,
  • or of being pledged or hypothecated, or liable to be attached or subject to any form of execution under a judgement or order of a court of law,….”
• Compulsory Annuities can be paid by a fund or can be in the name of a member (paid by an insurer).
• A compulsory annuity provided by a fund is compulsory, non-commutable and payable for and based on the lifetime of the annuitant.
• The compulsory annuity which is in the name of the annuitant is subject to section 37A.
• The definition of “pension interest” do not include compulsory annuities.
• Compulsory annuities paid to a member after retirement can therefore not be included in a divorce settlement.

Question 35

What are the implications of retirement funds on Estate Duty?

Answer 35

• From 2008 no upper age limit for retirement from retirement annuity & preservation funds
• Fund death benefits of retirement funds not subject to estate duty
• Possible to avoid estate duty by transferring assets to retirement annuity fund before death.
• Lump sums paid to dependant, beneficiary or deceased estate subject to income tax in hands of deceased in terms of lump sum retirement tax regime
• However, lump sums equal to amounts above allowable deduction (i.e. non-deductible contributions) not subject to lump sum tax regime, as it would qualify as deduction in terms of the Second Schedule.
• Budget speech proposal that, an upper age limit for retirement from retirement funds be imposed and that amount equal to the non-deductible contributions to retirement fund included in dutiable estate of member upon death.
• Proposal from National Treasury concern that some individuals are transferring assets to retirement annuity funds for purpose of avoiding estate duty, rather than providing for retirement
• Important development as many financial planners advised clients with surplus assets to transfer lump sums to retirement annuities as estate planning tool.

Question 36

How has Sec 3 of the Estate Duty Act been amended?

Answer 36

Sec 3 of the Estate Duty Amendment

• (bA) so much of the amount of any contribution made by the deceased in consequence of membership or past membership of any pension fund, provident fund, or retirement annuity fund, as was not allowed as a deduction in terms of section 11(k) or (n) of the Income Tax Act, 1962 (Act No. 58 of 1962), or paragraph 2 of the Second Schedule to that Act or, as was not exempt in terms of section 10C of that Act in determining the taxable income as defined in section 1 of that Act, of the deceased;’’.
• (2) Subsection (1) comes into operation on 1 January 2016 and applies in respect of the estate of a person who dies on or after that date in respect of contributions made on or after 1 March 2015.”

Thus important

• (1) Contributions made to a retirement fund that have not been allowed as a deduction either:
  
  • (a) When the contributions were made; or
  • (b) Deducted as against lump sums taken by the deceased before death; or
  • (c) Exempted against the annuity income of the deceased after retirement of the deceased will be included in the estate of the deceased as “property” in the estate if
• (2) The deceased died on or after 1 January 2016; and
• (3) The excess contributions were made on or after 1 March 2015.

Problematic Areas

Following areas are problematic with regards to proposal:

• Where benefit in the form of either retirement fund lump sum or annuity accrues to beneficiary/dependant, value of disallowed contributions to fund will be deemed property in estate of deceased & may attract estate duty: Sec 11 of Estate Duty Act would have to be amended to facilitate apportionment of estate duty and & recovery from the beneficiary/dependant by executor.
• Where trustees of a retirement fund exercise their discretion in such a fashion that fund benefits are allocated to surviving spouse of the deceased and other persons, or where surviving spouse and other persons are nominated as beneficiaries on a member-owned living annuity, and there are contributions not previously allowed as a deduction, questions arise as to practical application of Section 4q.

Question 37

Under which conditions can a pension received from a foreign source be exempted from normal tax?

Answer 37

• Section 10(1)(gC)(ii) exempts from normal tax any pension received by or accrued to a resident from a source outside the Republic as consideration for past employment outside the Republic.
• From 1 March 2015 this exemption is also applicable to lump sums received from pension funds.

Explanation

• The term “source outside the Republic” can be interpreted to mean either the originating cause which gave rise to that pension (foreign services rendered), or the location from which the pension is received (namely, where the fund is situated).
• The term “past employment outside the Republic” refers to services rendered outside the Republic. Only the portion of a pension that relates to services rendered outside the Republic is exempt from income tax.
• SARS Binding General Ruling 25 of 14 November 2014: “The term “source outside the Republic”, for purposes of section 10(1)(gC)(ii), refers to the originating cause which gives rise to the pension income, namely, where the services have been rendered. “
• The following formula is used to calculate the portion of a pension that will be exempt due to services rendered outside the Republic:
  
  • (Foreign services rendered/Total services rendered) x Total pension received or accrued