Retirement Funds (03) Flashcards
What is the main objective of a retirement fund?
To provide benefits at retirement of its members.
The type of benefit which the member is entitled to is determined by the
- type of fund
- funding structure
- and the fund rules.
- Rules can provide for the benefit to be paid from the fund
- Alternatively, the fund rules may determine that the
member’s benefit will be utilised to purchase a pension from a long-term insurer.
– The board must ensure that the member has been made aware of any cost, fees or commissions and that the implication of these cost, fees and commissions on the benefit has been properly explained.
What are the purpose of death benefits in a retirement fund?
- Provide benefits to the beneficiaries of a deceased member.
- The rules of the fund must therefore set out the quantum and manner of payment of benefits on the death of the member.
- Some funds provide additional death benefits which will pay out over and above the minimum benefits payable. These benefits can be expressed as a
- multiple of salary (4 x annual salary),
- be a function of the premium (so much as can be purchased by 2% of salary)
- or a flat rand amount (R100 000)
- These additional benefits are often reinsured with along- term insurer and are then referred to as group life insurance benefits.
What is the difference between approved and unapproved life policies?
Approved
Where the benefits are incorporated in the rules of a retirement fund, the benefits are referred to as “approved” group life benefits, as the benefits are provided by an entity that has been approved as either a pension fund, provident fund or benefit fund in terms of those definitions in the Income Tax Act.
Unapproved
Group life insurance can also be provided on an “unapproved” basis. These are simply group life benefits provided in terms of the provisions of an insurance policy, which is generally arranged by an employer for the benefit of its employees, but which is separate from the retirement fund in which the employer participates.
How are approved policies taxed from a death benefit point of view?
Approved group life insurance policies are essentially long- term insurance policies issued to retirement funds to provide benefits on the death of fund members.
Responsibility to Pay
The policy is held in the name of the fund and is put in place to reinsure the benefits payable in terms of the fund rules. It is important to note that a fund WILL REMAIN LIABLE to pay those benefits, even where the relevant insurer repudiates the claim, unless the benefit payable by the fund is limited in the fund rules to the amount paid to the fund by the insurer. For this reason, rules generally limit the liability of the fund to pay such benefits to the amount paid to the fund by the insurer.
Determining who gets paid
When a member dies, the fund will claim the insured benefit from the insurer who will then pay the benefit to the fund. The trustees will determine how the benefits will be distributed among the member’s beneficiaries.
Payment of premiums
Premiums to the insurer for the life cover are paid by the retirement fund (usually from the employer contribution to the fund).
Tax deduction of contributions
The employer may claim a tax deduction on the contributions to the fund in terms of section 11(l).
Tax free benefits from insurer to fund
The fund is not liable to pay tax on the premium, and benefits are paid to the fund “tax-free”.
Tax payable on payout to beneficiary
Tax on the benefit becomes payable as soon as the benefit is paid to the deceased member’s beneficiaries.
- Lump sum - If the benefit is paid as a lump sum, it is taxed in terms of the Second Schedule to the Income Tax Act as if it had accrued to the member immediately prior to the member’s death.
- Beneficiary fund - A benefit paid to a beneficiary fund will therefore be taxed and the income paid from the beneficiary fund will be exempt from tax.
- Compulsory annuity - If the rules of the fund provide for the benefit to be paid as a compulsory annuity, the benefit may be applied to purchase annuities for the beneficiaries, in which case the purchase of the annuities take place without tax being payable on the amount transferred to the insurance company and only the monthly annuity payments being taxed as normal income.
What are withdrawal benefits in the context of a retirement fund?
WB’s are paid prior to retirement or death, where no other benefit is payable in terms of the rules of the fund and would usually arise on the resignation, retrenchment or dismissal of the members from the service of the employer.
This benefit could also be payable in the event of the member.
The quantum of the benefit will be set out in the rules, and is again subject to the minimum benefits criteria.
On withdrawal, the member has a number of options available.
- The benefit can be transferred to a preservation fund, retirement annuity fund or the new employer’s fund.
- Alternatively, the member could elect to take the benefit in cash.
- The member can also take part of the benefit in cash and transfer part to a retirement annuity fund or the new employer’s fund, or transfer partially to a retirement annuity fund and partially to a preservation fund.
How will National Treasury change the way that withdrawal benefits are treated?
National Treasury intends to propose significant amendments to pension fund and tax legislation in order to promote preservation of retirement benefits.
One such amendment is that members will on termination of service be PREVENTED from taking their full withdrawal benefits in cash.
The date of implementation of this amendment is referred to as “P-day”, but at this point very little progress has been made on these proposals and no proposed implementation date is available.
Should these amendments be implemented, they are envisaged to include the following:
− that with effect from P-day, funds will NO LONGER be permitted to pay cash withdrawal benefits to members;
− fund boards will have to identify a DEFAULT PRESERVATION option, either within the fund itself or as an existing external preservation fund;
− withdrawal benefits must with effect from P-day be paid to the default preservation option, alternatively to a preservation fund of the member’s choice, subject to
a de minimis concession;
− the restriction of one withdrawal per amount transferred to a preservation fund will be removed and annual withdrawals, subject to a limit of 10% of the initial amount transferred or the Old Age Grant will be available;
What are unclaimed benefits in the context of retirement funds?
Members often leave fund without claiming the benefits payable to them.
There are a variety of reasons for this:
- apathy
- their tax affairs not being in order
- or their not being aware that they are entitled to a benefit.
Whatever the reasons, this has given rise to large sums of money lying dormant in retirement funds waiting to be claimed.
What were the historical tax implications for unclaimed benefits?
Since the member entitled to the benefit had not yet come forward (or could not be traced), fund administrators did not apply to SARS for tax directives on such benefits in the past and accordingly no tax was paid on these benefits, despite these benefits having accrued for tax purposes.
In July 2003, SARS became aware of this practice and launched a project whereby all funds were required to make a bulk tax payment to SARS for tax payable on unclaimed benefits that had accrued up to that date.
In April 2004, SARS issued a note setting out their interpretation of the Income Tax Act insofar as it related to unclaimed benefits and the accrual of tax thereon.
- The most significant consequence of this note was that members and fund administrators were given a six-month grace period within which to decide what to do with their monies. Thereafter funds were obliged to apply for a tax directive.
- In the case of death benefits, funds became obliged to deduct tax within six months after date of death.
- The tax deferment for transfers to another approved fund also fell away where an election to transfer was made after the expiry of this period.
What is the current tax implications for unclaimed benefits?
The Financial Services Laws General Amendment Act 22 of 2008 introduced a definition of “unclaimed benefit” in the Pension Funds Act. See Handbook).
Funds are permitted to transfer benefits that qualify as “unclaimed benefits” in terms of the Pension Funds Act to unclaimed benefit funds.
In addition, due to the changes to taxation of withdrawal benefits introduced by the Revenue Laws Amendment Act 61 of 2008, the accrual date of a withdrawal benefit has been changed to the date on which the benefit is paid in cash or transferred to another fund (subject to the permissible tax-free transfers).
As a result, a benefit NO LONGER has to be taxed within six months of the date on which it becomes due and payable in terms of the fund rules and therefore, a benefit that remains unclaimed is not taxable until date of payment or transfer.
In addition, the Income Tax Act was amended to provide that an unclaimed benefit that had previously been taxed (before the tax legislation was amended) and that is now transferred to an unclaimed benefits fund, may be transferred to such fund free of tax.
What does the PFA say about a principal officer?
Section 8
Every registered fund must have a principal officer.
The Registrar must be notified of the name of the Principal Officer within 30 days of (a) the registration of the fund or (b) the date of the appointment of a new Principal Officer.
The Registrar must be satisfied that the proposed principal officer is a fit and proper person for the appointment.
The Act lays down criteria amongst which would disqualify a principal officer from taking up the position.
A principal officer must inform the Registrar within 21 days of being dismissed from the position detailing the reasons for such dismissal.
What does the PFA say about the appointment of an auditor?
Section 9
The fund must appoint an auditor within 30 days of registration and apply to the Registrar for approval within 30 days of the date of appointment.
The auditor may not be an officer of the fund and must be registered under the Auditing Professions Act.
- An auditor must inform the Registrar within 21 days of being dismissed from the position detailing the reasons for such dismissal.
- If an auditor would have submitted a report, but for his termination, the report must still be submitted.
- An auditor is bound by the Act to report to the Registrar any matter that may prejudice the fund or its members.
What restrictions does the PFA place on a fund in terms of the business it may carry out?
Section 10
Business which may be carried on
Unless it is to protect an investment made by the fund and unless it receives the Registrar’s approval, no fund may carry on any business other than the business of a pension fund.
Who can value the fund according to the PFA?
Section 9A
Appointment of valuator (actuary)
If the fund is obliged to have its financial condition investigated in terms of section 16, the fund must appoint a valuator who must be acceptable to the Registrar.
How are rules of a fund changed according to the PFA?
Section 12 - Amendment of rules
- Amendments of the rules must be done in accordance with the rules themselves.
- Any changes are effective only when registered by the Registrar.
- Any rule changes that affect the financial condition of the fund must be accompanied by a certificate from the valuator stating how the fund will handle the change in its financial condition.
- Proposed amendments must be submitted to the Registrar by the principal officer within 60 days of the resolution to change the rules.
What are the requirements in terms of contribution transfers?
Sec 13A - Payment of contributions
Contributions must be paid to the fund or the fund’s administrator within seven (7) days of the end of the month for which they are due and they must be deposited by the fund or the fund’s administrator to the credit of the fund by the end of the next business day.
Documentation supporting the contributions, if not supplied with the contributions, must be furnished within fifteen (15) days of the end of the month to which the contributions apply.
Such documentation must contain minimum information as set out in Regulation 33.
Transfers to other funds (apart from sec 14 transfers and transfers in the event of liquidation or dissolution of the fund) must be made within 60 days of the member’s written request.
Interest shall be payable on late payment of contributions or transfers and is prescribed in the Government Gazette.
