Draft Binding General Ruling: Purchase of different types of annuities at retirement
This means that the annuity may not be transferred, assigned, reduced, hypothecated or attached by creditors as contemplated by the Pension Funds Act.
Background
By virtue of an agreement, retirement funds were permitted to terminate their continued liability in respect of a retiring member once an annuity was purchased, subject to certain terms and conditions as laid out in General Notes 18 and 18A. Both General Notes 18 and 18A were withdrawn on 26 February 2021.
This draft Binding General Ruling (“BGR”) is issued to provide clarity after the withdrawal of General Notes 18 and 18A.
Discussion
The proviso to the definitions of retirement fund in the Income Tax Act permits the Commissioner to prescribe additional limitations and conditions for the approval of rules of retirement funds.
An annuity may not be transferred, assigned, reduced, hypothecated, or attached by creditors in terms of the Pension Funds Act. This is however not something specifically governed by the Income Tax Act.
The definitions of each type of retirement fund in the Income Tax Act state that up to one-third of the member's total retirement interest may be commuted for a single payment and the remainder must be paid in the form of an annuity. These provisions do not prescribe whether the annuity must be provided by the retirement fund or purchased from an insurer nor does it prescribe the nature or characteristics of such an annuity.
Ruling
The BGR states that it is accepted that the following practice still prevails and is in line with an exercise of the Commissioner's discretionary power. The rules of retirement funds may therefore provide for:
- the retirement fund paying the annuity directly;
- purchasing the annuity in the name of the retirement fund; and
- purchasing the annuity in the name of a retiring member.
It is further confirmed that no annuity provided on retirement may be transferred, assigned, reduced, hypothecated, or attached by creditors and must be compulsory, non-commutable, payable for, and based on the lifetime of the retiring member.
Find a copy of the draft Binding General Ruling here.
18/06/2021