Tuesday, November 4, 2008

Tax Law changes 2008 - Retirement Annuity Funds

In my last blog post I examined the changes to the definition in section 1 of the Income Tax Act of ‘pension funds’. The same changes will apply to provident funds. As a reminder, when you retire from a pension fund, you can commute (ie reduce to a lump sum) up to one-third of the total annuities to which you are entitled. This will amount to one-third of the money actually available to you at date of retirement.

You have to use the balance of two-thirds to purchase a regular monthly pension for life. In a future blog I will discuss the many options open to a retiree in purchasing this pension. When you retire from a provident fund, on the other hand, you can take 100% of the amount available in a lump sum.

A Retirement Annuity Fund (commonly known as an ‘RA Fund’) is really a one-person private pension fund, not linked to employment or to an employer. There are many advantages to contributing to an RA, not least income tax advantages, and these will form the subject of a future blog post. In the meantime, however, you need to be aware of the proposed changes to the definition of RA Fund. Some of these are quite radical.

For example, where a member dies prior to retirement, leaving no dependents, and has also failed to nominate a beneficiary (or nominee) to receive the benefits he/she would have received had he/she reached retirement, the Act presently does not allow for the money to be paid to his/her deceased estate. This will now be permitted.

On death prior to retirement, there is presently a complicated formula to arrive at the amount of the maximum lump sum available. This will be replaced by the same ‘one-third’ of fund value which applies on retirement. If your fund value is less than R7000, you may withdraw the full amount prior to age 55, which is the earliest retirement date for a member of an RA.

In terms of the proposals, regardless of your fund value, if you emigrate you may also withdraw your funds prior to retirement, provided you are prepared to pay income tax on that withdrawal benefit. No transfer to another fund abroad will be allowed, and only a cash withdrawal benefit may be taken. By ‘emigrate’ is meant an official emigration in terms of which you complete the relevant State forms, you apply for the appointment of an authorised dealer to control your blocked assets, you pay CGT on the deemed sale of your assets and receive the SARS clearance certificate.

If you avoid these hassles by simply relocating, which is what most people do, you cannot withdraw your RA monies, but must wait until age 55 to retire and then take the one-third lump sum and us the two-thirds to purchase a pension, which has to be paid into your SA bank account. From here you can remit it offshore, subject to any exchange control rules pertaining at that time. Hopefully by the time you come to retire these would have been totally removed.

If the total amount in your fund is less than R75 000, then on retirement or death, you or your executor may commute the total fund value.

In case you need or wish to keep working beyond normal retirement age, the present maximum age of 70 years will be scrapped. Possibly some age restriction will be imposed in the fund rules or by SARS in its General Notes to funds.

Retirement reform is long overdue, and these changes go some way in this process, but rest assured, there will be many more to come in the future. The comforting factor is that the State is supportive of individuals’ efforts to make provision for their own retirement, and rewards them handsomely through a very generous tax dispensation, which is one of the most generous to be found in any country in the world which has pension provisions.

Clive Hill
Financial Services Manager

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