NEW OPTION FOR RETIREMENT FUND TRANSFERS

IN 2017, the Income Tax Act was amended to allow employees to transfer their benefits from employer pension or provident funds to a retirement annuity (RA) fund on or after reaching normal retirement age, but before retirement date. These amendments increased the choice of available retirement funds in cases where individuals decided to postpone retirement.

Transfers to pension and provident preservation funds, however, remained excluded for fear that it would be administratively burdensome since it could result in the withdrawal of all benefits as a lump sum, rather than the preservation of funds.

This has now been changed – the Taxation Laws Amendment Act No 23 of 2018 (the TLAA), as published on January 17, 2019, has extended this option to include preservation funds as well. Let’s unpack these changes and the implications thereof on preservation funds.

During retirement, individuals who are members of a retirement fund have the option to either annuitise the entire pension fund interest or take up to one third of it as a lump sum (depending on the type of fund). Where the individual:

◆ Annuitises a portion of the benefit, the annuities are taxed as normal income according to the individual’s marginal tax rate.

◆ Elects to take a portion of the benefit as a lump sum, the lump sum is taxed according to the retirement fund lump sum benefit table.

Accordingly, at the date of retirement, members are compelled to make an election as to the portion of their retirement interest that they would like to receive as a lump sum and as an annuity. The fund, in turn, then has to apply to the SA Revenue Service (Sars) for a tax directive to determine the amount of tax that must be withheld from the lump sum payment to the retiring member.

The lump sum benefit is deemed to accrue to the individual on the earliest of the dates at which an election is made, a transfer is made, death, or on his or her retirement.

As of March 1, 2015, the date on which a lump sum benefit accrues to the member at retirement is no longer triggered by the “normal retirement age” as set out in the fund rules – it will only accrue on the date that the member elects to receive it (ie, when it becomes payable). As a result, retirement funds have to apply to Sars for a tax directive on the date that the election is made.

The definition of “Retirement Date” was accordingly amended to state that a member’s retirement date will be the date on which he or she elects to retire in terms of the rules of their fund and the definition of “Retirement Interest”, in turn, was amended to refer to the member’s share (of the fund per the fund’s rules) on the date on which “he or she elects to retire”.

Currently, when a pension/ provident fund member chooses to defer his/her retirement date after reaching normal retirement age, he can either:

◆ Remain a deferred retiree of the employer pension or provident fund, or

◆ Transfer the retirement interest benefit to an RA fund.

The TLAA 2018 has amended the Income Tax Act to make provision for the member, when reaching retirement age, to transfer his/her retirement interest to a preservation fund as well.

Lize de la Harpe is a legal adviser of Glacier by Sanlam.