Retirement Funds Flashcards
What is a pension fund organisation?
PFA makes no differentiation between pension, provident and RA funds.
It has a definition of “pension fund organisation”. It is wide enough to include all three funds
It contemplates 3 types of funds
- Occupational (established by employer for employees)
- Non occupational funds (pension and provident preservation funds no employee/employer relationship)
- Beneficiary fund
- Unpaid benefits preservation fund.
Definition of “unclaimed benefit fund” inserted into PFA in 2013.
Name some of the documents that must accompany the application
Two signed copies of fund rules to be included.
- Registrar of Pension Funds and CSARS must approve the rules.
The authority in terms of which the fund was established
Prescribed fees
Application must also include
- Full name of the fund
- the physical and postal address of the registered office of the fund
- the name and address of the appointed administrator
- the name, physical and postal address of each participating employer
- initial rate of contributions payable by each participating employer (if this is not included in the fund rules)
Provisional Registration - Followed by Final registration
What must be included in the rules?
The rules set out the
- nature and extent of the benefits to which member and their beneficiaries are entitled
- as well as the manner in which the fund will operate
They are binding on the fund, its members and officers as well as an person who claims under the rules.
Rules must be in a prescribed format
Who approves the tax nature of pension fund organisations?
In order to qualify the tax advantages afforded, the funds must be approved by CSARS (also registered with Registrar).
What were/are the differences between the different pension fund organisations in terms of tax consequences?
Employer contributions – deductible without limit
- Contribution made by employer is included in gross income of employee as fringe benefit.
- Contributions made by the employer are deemed to have been made by the member (employee).
- The employee/member can deduct from his income
- 27,5% of the greatest of taxable income and “remuneration” as defined (retirement fund lump sums excluded), but capped at maximum of R350 000.
NB. This deduction is not just for pension fund contributions, but in respect of the total of the member contributions to all pension, provident and RA funds.
What are the benefits of a pension fund?
On retirement the member can take
- a maximum of one-third of the benefit in cash (lump sum) - and must take a life annuity with at least two- thirds of his retirement interest.
- If two-thirds of the retirement interest does not exceed R165 000 the full amount can be taken as a lump sum
- It means that the total amount can be taken as a lump sum if total retirement interest does not exceed
R247 500 (R165 000 ÷ 2 × 3).
This is referred to as the “de minimus” rule and applies to each separately registered fund e.g. the person is a member of two pension funds and retires from both.
What are the benefits of a provident fund?
It is also an occupational fund.
Currently the full retirement benefit can be taken as a lump sum even if the retirement interest exceeds R247 500.
As from 1 March 2018 there should in essence be no difference between a pension and a provident fund as the way in which benefits can be taken will be aligned as from that date.
As from 1 March 2018 the position will be as follows
1. Person who on 1 March 2018 is 55 or older. Such a person can take his full retirement interest in the fund as a lump sum on retirement. The position for such a person is thus unchanged.
- In respect of a member who on 1 March 2018 has not yet attained the age of 55 the position will be that the following must not be taken into account
• contributions made to the fund prior to 1 March 2018, and
• amounts credited to member’s individual account prior to 1 March 2018.
• the fund return on contributions prior to 1 March 2018 and on the amounts credited to MIR prior to 1 March 2018.
It is then only in respect of contributions made on or after 1 March 2018 and amounts credit to MIR after 1 March 2018 plus fund growth on both, that the new rule will apply.
Example of rule
John can take the full R1 500 000 as a lump sum. In respect of the remaining R600 000 he can take one-third as a lump sum of R200 000 and the remaining R400 000 must be used to take an annuity.
If we assume the same as above except that the pension interest on 1 April 2020 is R1 740 000 then the position is that R1 500 000 can be taken as a lump sum and the balance of R240 000 is subject to the de minimus rule. As in total it is less than R247 500 it can also be taken as a lump sum.
What are the benefits on death?
On death
- Pension fund. The full pension interest can be paid as a lump sum.
- Provident fund. The full pension interest can be paid as a lump sum.
What are the benefits on resignation?
On resignation
- Pension fund. The full withdrawal benefit can be paid as a lump sum.
- Provident fund. The full withdrawal benefit can be paid as a lump sum.
What are further requirements of the pension fund as per it’s definition?
Pension fund – further requirements as per the definition
- Registration (done)
- There must be an employer/employee relationship
- Membership is compulsory and a condition of employment for the class of persons for whom the fund was created. The applicable requirement in the definition reads as follows:
Membership
bb) membership as condition of employment (class/classes/all) for all employees that become employees on or after the date upon which
- –A) Fund comes into operation
- –B) the employer becomes a participant in the fund
cc) for existing employees, they can apply within a period of not more than 12 months as from date above to become members of the fund.
Other
ee) Partner in partnership is employer of partnership
ee) CSARS to be notified of all amendments to the rules.
What is a pension preservation fund?
“pension preservation fund” means a fund that is a—
a) PENSION PRESERVATION FUND as defined in section 1 of the Income Tax Act, 1962 (Act No. 58 of 1962); or
b) PENSION FUND as defined in section 1 of the Income Tax Act, 1962 (Act No. 58 of 1962), doing the business of a pension preservation fund as prescribed by the Commissioner in terms of that Act;
Who can be members of a pension preservation fund?
Former members of any other pension fund, provident fund, pension preservation fund or provident preservation fund due to:
General 1) - Resignation - Retrenchment - Dismissal And elected to have it transferred
2) The winding up of the fund and the member elected to have it transferred.
3) A transfer of business from one employer to another in terms of the Labour Relations Act and employment transferred to transferee company.
Special 1
Former members of any other pension fund, provident fund, pension preservation fund or provident preservation fund.
- If such fund is wound-up up or partially wound-up
- If the member elected to have the amount (as per para 2(1)(b)(ii) transferred to the fund and made the election while still a member of the other fund.
Special 2
- Former members of a pension fund or nominees or dependants of that former member in respect of whom an “unclaimed benefit” as defined in the Pension Funds Act is due or payable by that fund;
- Persons who have elected to transfer to that fund amounts awarded to those persons in terms of any court order contemplated in section 7(8) of the Divorce Act, 1979 (Act No. 70 of 1979), from any pension fund or pension preservation fund for the benefit of those persons;
What are the limitations in terms of the sources of funds from which amounts can be transferred from in terms of pension preservation?
(b) payments or transfers to the fund in respect of a member are limited to any amount contemplated in paragraph 2 (1) (a) (ii) or (b) of the Second Schedule or any unclaimed benefit as defined in the Pension Funds Act, 1956 (Act No. 24 of 1956), that is paid or transferred to the fund by—
(i) a pension fund or any other pension preservation fund of which such member was previously a member; or
(ii) a pension fund or pension preservation fund of which such member’s former spouse is or was previously a member and such payment or transfer was made pursuant to an election by such member in terms of section 37D (4) (b) (ii) of the Pension Funds Act;
What are the withdrawal benefits of a pension preservation fund?
(c) with the exception of amounts transferred to any other pension fund, pension preservation fund or retirement annuity fund, not more than one amount contemplated in paragraph 2 (1) (b) (ii) of the Second Schedule is allowed to be paid to the member during the period of membership of the fund or any other pension preservation fund: Provided that this paragraph applies separately to each payment or transfer to the fund contemplated in paragraph (b);
It definitely means at least one withdrawal (full or partial).
It may mean that there is one withdrawal per transfer in that happened under paragraph b)
What are the retirement benefits of a pension preservation fund?
(d) a member, other than a member contemplated in paragraph (a) (iii) of this proviso, will become entitled to a benefit on his or her retirement date;
