Proposals Affecting the Retirement Industry
Allowing Members to Use Retirement Interest to Acquire Annuities at Retirement
At retirement, a member of a retirement fund may receive an annuity. The annuity is to be provided with the balance of the member’s retirement interest following commutation (where the member is allowed to take, or commute, a lump sum equal to a maximum of one‐third of the retirement interest when they retire). The retirement fund can provide the annuity by paying it directly to the member or purchasing it from a South African registered insurer in the name of the fund, or purchasing it in the name of the retiring member. If a member opts to receive an annuity, the full value of their retirement interest following commutation must be used to provide either of the abovementioned annuities. Therefore, a member is prohibited from using their retirement interest to acquire various annuities. To increase flexibility for a retiring member and maximise the retirement capital available to provide for an annuity, Government proposes expanding the amount of retirement interest that may be used to acquire annuities.
Comment: If the intention is that the retiree can combine an annuity provided by the fund with an annuity provided by a long-term insurer, this is to be welcomed.
Applying Tax on Withdrawals of Retirement Interest When an Individual Ceases to Be a Tax Resident
When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the act. At issue is the tax treatment of retirement interest when an individual ceases to be a South African tax resident, but retains his/her investment in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment. Section 9(2) (I) of the act deems such amounts to be from a South African source, thus remaining within South African tax jurisdiction despite the individual no longer being a South African tax resident. The challenge arises when the individual ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country. When that individual withdraws from the retirement fund, due to the application of the tax treaty between South Africa and the other country, the retirement fund interest will be subject to tax in the other country as the individual will, in terms of the tax treaty, be regarded as a tax resident in that other country. The provisions of the tax treaty between South Africa and the new resident country will result in South Africa forfeiting its taxing rights. To address this anomaly, Government proposes changing the legislation as follows:
When the individual ceases to be a South African tax resident, the retirement fund interest will form part of the assets that are subject to retirement withdrawal tax. The individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident.
If the individual ceases to be a South African tax resident but leaves his/her investment in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires from employment, then the retirement withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund or as a result of retirement. When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an annuity. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident.
Comment: The practical implication and/or implementation of this proposal remains to be seen.
Transfers Between Retirement Funds by Members Who Are 55 Years or Older
The Income Tax Act stipulates that any transfer by a member of a pension, provident or retirement annuity fund (who has opted to retire early) into a similar fund would be considered a taxable transfer. The policy in this regard is not intended to tax transfers from a less to a more restrictive fund, or between similar funds. To address this anomaly, government proposes allowing tax-free transfers into more or similarly restrictive funds by members who have already opted to retire.
Comment: Government is intending to rectify certain anomalies in the Income Tax Act regarding such transfers, and this is to be welcomed.