05 - Retirement Planning Flashcards

Question

When is a member allowed to withdraw? Pension Preservation Fund and Provident Preservation Fund

Answer 1

**_Pension Preservation Fund and Provident Preservation Fund:_** * Where a member has transferred funds from a pension fund to a pension preservation fund or from a provident to a provident preservation fund (e.g. on resignation from employment), * one withdrawal (the member may withdraw the full benefit or less depending on his/her wishes) is allowed from the pension preservation fund or provident preservation fund before retirement. **Divorce** * Divorce award payments made ito section 37D of the Pension Funds Act will not prevent transfers to a preservation fund and will not affect the 1 withdrawal option available to members of preservation funds. **Emigration** * Members may not access benefits upon emigration like with RA’s – Submissions have been made to Treasury in this regard * Previously the member had to transfer his/her full benefit from a pension fund to a pension preservation fund or from a provident to a provident preservation fund and one withdrawal was allowed after transfer, but this has since been changed and the member may now, on resignation from the pension or provident fund take an amount in cash and then transfer the balance into a pension preservation or provident preservation fund, where after the one withdrawal as discussed above will be allowed – see RF 1 of 2012. **GEPF (Government Employees Pension Fund)** * However specific rules with regards to a transfer from the Government Employees Pension Fund (GEPF) to another fund. * Rule 14.4.1 of the Rules of the GEPF provides as follows: * “Such transfer shall be made subject to the rules of the approved retirement fund specifying that, with reference to the transfer benefit, * any subsequent lump sum benefit payable by that fund or any successor fund to the member and/or his beneficiaries shall be limited to one third of the said transfer benefit, with interest. * The balance of the member's transfer benefit with interest, after deduction of any lump sum payment referred to above, * shall be applied for the purchase of an annuity, albeit immediately or upon the member's ultimate retirement." * The following is thus important where a transfer benefit is transferred from the GEPF to a pension preservation fund: * i) The full benefit has to be transferred to the pension preservation fund, i.e. the member will not be allowed to take a portion in cash and transfer the balance to the pension preservation fund. * ii) If the member elects to take a withdrawal before retirement, such withdrawal will be limited to one-third of the fund value, and if the member takes the full one-third as a withdrawal, the member will not be allowed a further lump sum on retirement – the member will have to annuitise the full amount on retirement. * In practice, it would appear that there are funds that interpret this rule differently.

Answer 2

* In the case of a pension or provident fund, as transfer to another fund is only allowed when the member resigns from employment or is dismissed or retrenched. * In the case of a retirement annuity fund, pension preservation or provident preservation fund transfers are generally speaking allowed at any time. * The following transfers are allowed to take place tax-free: * Provident - Provident/Preservation, Pension/Preservation, RA * Pension - Pension/Preservation, RA * RA - RA

Answer 3

Where an amount is transferred into a pension preservation fund from a pension or another pension preservation fund it may not be transferred in such a way that it is split between more than one pension preservation fund – RF 1 of 2012. Where an amount is transferred from a pension preservation fund such amount may only be transferred to: * one pension fund; * one pension preservation fund; * one retirement annuity fund; * a combination of one pension preservation fund and one retirement annuity fund; * a combination of one pension fund and one pension preservation fund and; or * a combination of one pension fund and one retirement annuity fund.

Answer 4

Tax at withdrawal from retirement fund Second Schedule to the Income Tax Act (par 6)

Answer 5

**_After 1 March 2009_** Par 6 of 2nd Schedule as per the Taxation Laws Amendment Act 2009: Taxable portion = Withdrawal Lump Sum LESS: * Amounts transferred to approved funds (see slide 53); * Contributions which did not previously rank as a deduction i.t.o section 11(k); * Any amounts taxed upon transfer from one retirement fund to another (like Pension to Provident Fund transfers); * Any pre - 1998 amounts transferred from Public Sector Funds (or former par(a) or (b) funds) – the tax- free amount is calculated on the full amount transferred to another fund; * Any divorce awards previously taxed when transferred to a retirement fund. **_Approved transfers_** Approved transfers are as per (par 2(b)(iB)) of 2nd Schedule: * _Pension_ -\> _Pension, Pension Preservation and RA_ * _Pension Preservation_ -\> _Pension Preservation and RA_ * _Provident_ -\> _Provident, Provident Preservation, Pension Preservation and RA_ * _Provident Preservation_ -\> _Provident Preservation, Pension Preservation and RA_ * _RA_ -\> _RA_ **_Taxtables_** (not applicable where the member withdraws as a result of a 'retrenchment' situation) * R0 – R25 000 0% of taxable amount * R25 001 – R660 000 - 18% of taxable amount above R25 000 * R660 000 – R990 000 - R114 300 + 27% of taxable amount above R660 000 * R990 001 and above - R203 400 + 36% of taxable amount above R990 000

Answer 6

* Where withdrawals are made from the GEPF and other Par (a) & (b) funds, e.g. the Transnet Retirement Fund) and the member belonged to this fund before 1 March 1998, a formula has to be applied to establish the taxable portion of the lump sum, as lump sums received from GEPF (and other funds e.g. Transnet Retirement Fund) were only taxable form 1 March 1998. * Calculated in terms of Par 2A of the 2nd Schedule to the Income Tax Act: * A = B/C x D, where * A = the taxable portion of the lump sum; * B = The number of completed years of service as member of the GEPF after 1 March 1998; * C = The total number of completed years of service as member of the GEPF ; and * D = The lump sum payable to the member.

Answer 7

Definition of “normal retirement age” as per section 1 of the Income Tax Act, which essentially provides: * i. A member of any fund (pension, provident, retirement annuity, pension preservation and provident preservation fund) may retire on becoming “permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body”. * ii. If not as a result of a situation contemplated in i. above, in the case of a pension or provident fund, the date on which the member becomes entitled to retire form employment (NB – bear in mind that where we are dealing with a provident fund, and a member has not reached age 55 or is not “disabled” as per i. above, any lump sum received by such member will be taxed as a “withdrawal benefit”, irrespective of the fund rules, unless the Commissioner on application directs otherwise – Par 4(3) of the 2nd Schedule to the Income Tax Act). * Income Tax Act amended from 1 March 2015: before this date a lump sum was deemed to accrue to the member at the earliest of the happening of certain events, including retirement, i.e. at normal retirement age. * The effect of this was that a member of a pension/provident fund was compelled to retire from such a fund upon reaching normal retirement age. * The deeming provision with regards to retirement was removed – the practical effect is now that the member can “preserve” his benefit in the pension/provident fund until he elects to retire from the fund, if the fund rules allow for this. * iii. If not as a result of a situation contemplated in i. above, in the case of a retirement annuity, pension preservation or provident preservation fund, the date on which the member reaches the age of 55. Member is not compelled by the Income Tax Act to retire at age 55 though – no maximum age provided at which member must retire (one must however always check the rules of the fund and the provisions or the provisions of the specific contract to establish whether the client will be obliged to retire or not).

Answer 8

**_Pension, retirement annuity and pension preservation fund_** * the member will only be allowed to take one third as a lump sum and the balance (2 thirds) will have to be used to purchase a compulsory annuity, unless the total value of the member’s retirement interest in the fund is R247 500 or less (before 1 March 2016 this amount was R75 000). NB the amount of R247 500 is calculated per fund, i.e. not per retirement annuity contract (policy) or per insurer. **_Provident and provident preservation fund_** * A member may take the whole retirement interest as a lump sum on retirement (there is of course nothing prohibiting the member to take a smaller portion as a lump sum, or to take no portion as a lump sum and use the balance to purchase a compulsory annuity if the fund rules provide for it). * Effective from 1 March 2018, Provident Funds will be subject to the compulsory annuitisation regime (i.e. similar to pension funds etc. discussed above). * The following rules will however apply: * i.Balances in provident funds as at 1 March 2018 (and any subsequent growth thereon) need not be annuitised, i.e. it can still be taken as a lump sum; * ii.If a provident fund member is older than 55 years of age as at 1 March 2018, the mandatory annuitisation requirements will not apply to contributions to the fund together with any growth thereon, made by that person as a member of the fund, as from this date. NB: this is only applicable if the member retires from that specific provident fund. If the funds are transferred to another fund, the member will be treated similar to a person that is younger than 55 on 1 March 2018 (see i. above). **_Dependents_** * Pension, provident, retirement annuity, pension preservation and provident preservation funds: Dependants and/or nominees (beneficiaries) may take the whole amount as a lump sum, but could also take a smaller lump sum, or no lump sum and use the balance to purchase an annuity with. NB – also subject to rules of fund. * Benefits will include fund value, but may also include “approved group life benefits”: the term “approved group life benefits” essentially refers to group life insurance on the life of the member provided within the pension or provident fund, as opposed to loose standing group life cover provided by the employer through an insurer, but not through the pension or provident fund.

Answer 9

Distribution of death benefits of all the above funds are subject to the provisions of Sec 37C of the Pension Fund Act, which effectively required the following from the trustees of the fund: * If the member is survived by dependants only: Within a period of 12 months of the death of the member, the benefits must be paid to some or all of such dependents in proportions as may be deemed equitable by the board of the fund. * If the said board does not become aware or cannot trace any such dependant within the 12 month period and the member has nominated a nominee (who is not a dependent) in writing: * The benefit must be paid to such nominee (beneficiary), but * If the debts of the estate of the deceased member is more than the assets of the estate, an amount equal to such shortfall must be paid into the estate, and the balance, if any, to the nominee. * If the member is survived by both dependants and nominees: The benefit must be paid to such dependents and nominees in such proportions as the board deems equitable (this provisions is applicable to nominations made on or after 30 June 1989). * If the fund does not become aware or cannot trace any dependant of the member within 12 month period and the member has not nominated any nominee: the benefit must be paid to the estate of the member.

Answer 10

Dependant is defined in the Pension Funds Act as: * a person in respect of whom the member is legally liable for maintenance; * a person in respect of whom the member is not legally liable for maintenance, if such person— * i. was, in the opinion of the board, upon the death of the member in fact dependent on the member for maintenance; * ii. is the spouse of the member; * iii. is a child of the member, including a posthumous child, an adopted child and a child born out of wedlock. * a person in respect of whom the member would have become legally liable for maintenance, had the member not died;

Answer 11

Estate Duty: Generally speaking benefits in a pension, provident, retirement annuity, pension preservation, and provident preservation fund is not subject to estate duty on the death of a member. However * where a member of such a fund makes a contribution to such a fund on or after 1 March 2015, * and the contribution (or part thereof) was not deductible under Sec 11(k) (i.e. when the contribution was made) or in terms of the 2nd Schedule to the Income Tax Act (i.e. deductible from lump sums taken by the member before such member died), * or exempted from compulsory annuities in terms of Sec 10C (this will be discussed in detail in the second lecture), * the portion that had not been deducted/exempted on death will be included in the estate of the deceased for estate duty purposes. This aspect will also be discussed in more detail in the 2nd lecture.

Answer 12

Taxable portion = Retirement Fund Lump Sum LESS: * Contributions which did not previously rank as a deduction ito sec 11(k); * Any amounts taxed upon transfer from one retirement fund to another retirement (like Pension to Provident Fund transfers); * Any pre-1998 amounts transferred from Public Sector Funds (or former par(a) or (b) funds); * Any divorce awards previously taxed when transferred to a retirement fund. (Par 5 of the Second Schedule to the Income Tax Act)

Answer 13

Par 2(a) of 2nd Schedule as per the Taxation Laws Amendment Act 2009 The Retirement Table will apply if the termination of employment is due to: * The employer having ceased to carry on, or intending to cease carrying on the trade in respect of which he or she was employed, or * The person having become redundant because the employer had a general reduction in staff or a reduction in staff of a particular class; and * Members are not shareholders with more than 5% share capital/member’s interest in a company. Therefore the Retirement Table will apply in this instance and NOT the Withdrawal table like it usually would upon withdrawal from a retirement fund. **_Important_** * If the member decides to first transfer the benefit to a preservation fund on retrenchment * and thereafter decides to withdraw the benefit (or a portion thereof) the withdrawal will be taxed in terms of the withdrawal table and not the retirement table.

Answer 14

Severance benefits are defined in section 1 of the Income Tax Act. * It essentially includes any lump sum received from employer in respect of relinquishment, termination, loss etc, of office (employment) where the employee: * i. Is 55 years of age or older; * ii. Has become permanently incapable (disabled) as a result of sickness, accident, injury, infirmity of body and mind etc.; * iii. Is retrenched (either as a result of the employer ceasing to trade or where the employer is reducing personnel) and includes voluntary packages taken on retrenchment. * It will not be deemed to be severance benefit if the employee owns more that 5% share/member’s interest in the company. * If it is a benefit payable via an employer-owned policy (e.g. a deferred compensation policy), it will also not qualify as a severance benefit. * SARS also does not view leave pay as a severance benefit as it not viewed as a payment in respect of relinquishment, termination, loss etc of office (employment) – see SARS letter to ASISA dated 12 July 2012: no direct link between ceasing of employment and leave pay received – leave pay viewed as an amount received in respect of services rendered.

Answer 15

Any lump sums received from a retirement fund (either previous withdrawal or retirement) as well as severance benefits received will be taken into account in the lump sum tax calculation upon withdrawal, retirement, death or receipt of a severance benefit, where such previous withdrawal, retirement or severance benefit was received on or after the following dates: * Retirement lump sums which accrued on/or after 1 October 2007 will be taken into account; * Lump sums on withdrawal benefits which accrued on/or after 1 March 2009 will be taken into account (this will include withdrawal from retirement funds due to retrenchment); * Severance benefits as from 1 March 2011. **_Steps_** * Step 1 - Calculate the taxable lump sum for current tax year. * Step 2 - Identify and add previous taxable amounts from Retirement (as from 1 October 2007) and Withdrawal (as from 1 March 2009) and Severance Payments (as from 1 March 2011) * Step 3 - Add Step 1 + Step 2. * Step 4 - Calculate the tax payable on the total amount calculated in Step 3 – using the Withdrawal Table (withdrawals other than on retrenchment) or the Retirement Tax Table (retirement lump sums received on retirement, death or withdrawal on retrenchment or severance benefit received) * Step 5 - Calculate the tax payable on the previous amounts received – thus the amounts calculated in Step 2 – using the same tax table used in step 4. This amount is referred to as the “hypothetical tax”. * Step 6 - Tax payable is Tax calculated in Step 4 less Hypothetical tax calculated in Step 5

Answer 16

Non-Retirement Savings Vehicle – TAX-FREE SAVINGS ACCOUNT - Introduced on the 1st of March 2015 : * An annual amount of R30 000, subject to a lifetime limit of R500 000 * may be contributed to the new savings vehicle * and the returns & proceeds will be tax-free (i.e. the limit is on the contributions and not the investment value). * It may be interest-bearing and non-interest bearing investment. * Return on above investments will be exempt from income and dividends tax. * In determining the aggregate capital gain or capital loss of a person, any capital gain or capital loss in respect of the disposal of tax-free investments must not be taken into account. * Where a taxpayer contributes in excess of the prevailing annual and lifetime contribution limit in any year, a penalty of 40 per cent on the amount of the excess contribution will be levied by SARS on the individual. * The introduction of tax-free investments had no effect on interest exemptions in Income Tax Act and National Treasury has indicated that the interest exemption will not be removed, but that it will also not be increased, thus eroding its effect over time as a result of inflation. * Growth, including dividends and income reinvested not taken into account as contributions.

Answer 17

* No exemption in Estate Duty Act or any other Act with regards to estate duty * The returns earned by the taxpayer from tax-free savings accounts prior to death =“property” as defined in the Estate Duty Act. * Returns earned by estate after date of death = not “property” in estate. * However amounts within tax-free investments cannot be transferred to beneficiary’s tax-free investments. Any transfer of tax-free investments from one individual (or his estate) to another will be deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.

05 - Retirement Planning Flashcards

(42 cards)