Summary
Summary RSK3701 TEXTBOOK C4
- Institution
- University Of South Africa (Unisa)
Summary of 20 pages for the course RSK3701 - Risk Financing and Short Term Insurance at Unisa (RSK3701 TEXTBOOK C4)
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RETIREMENT ANNUITIES, ANNUITIES AND SUPPLEMENTARYBENEFITS CHAPTER 4
CHAPTER 4
RETIREMENT ANNUITIES,
ANNUITIES AND
SUPPLEMENTARY BENEFITS
Learning Outcomes
When you have completed this chapter you will be able to
list the rules that a retirement annuity needs to abide by in order to
be approved by the Commissioner for Inland Revenue;
explain how to establish the maximum tax deduction allowed by an
individual for contributions to a retirement annuity;
discuss the differences between a voluntary and a compulsory
purchase annuity;
list and explain the different types of immediate annuities that are
available;
list and describe the supplementary benefits that can be linked to
a life insurance policy;
explain permanent health insurance;
briefly describe hospital cash plans and major medical cover;
list the limitations imposed by ASISA‟s Code of Practice on the
Limitation of Disability Benefits.
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,RETIREMENT ANNUITIES, ANNUITIES AND SUPPLEMENTARY
BENEFITS CHAPTER 4
4.1 INTRODUCTION TO RETIREMENT ANNUITIES
The Pension Funds Act and the Income Tax Act make provision for the recognition of a
number of different types of funds. These are designed to give benefits on retirement, death
or ill health to members of the fund and/or their dependants. Only two of these can, however,
truly be called employee benefit funds.
The on-going relationship between an employer and an employee needed in a pension, or a
provident fund, provides the opportunity for the employer to contribute towards the benefits of
his employees. These are covered in more detail elsewhere.
There are, however, other types of retirement funds that can provide valuable benefits to
members without needing a continuous employer presence. In fact, with a retirement annuity
fund the employer cannot make a meaningful contribution on behalf of a member at all. The
member is the only party to the scheme, and no employer / employee relationship exists.
The marketing of retirement annuity funds is, in fact, completely different from the way that
pension or provident funds are marketed. In the marketing of what have generally come to be
known as employee benefit funds, pension and provident funds, the presentation of the
scheme is made to a group of people who will normally make the membership decisions on
behalf of the members or prospective members.
Membership of a retirement annuity, on the other hand, is sold to individual persons. The
marketing of retirement annuities is generally undertaken by individual life insurance
intermediaries, such as the agents of an insurer or a broker. Members are, in fact, normally
under the impression that they are purchasing an individual life policy.
While it is true that each member who elects to join a retirement annuity fund will be issued
with a policy document, this document is, other than in the case of an ordinary life insurance
policy, not proof of ownership but simply proof of membership.
Take very careful note of the fact that, while a retirement annuity purchased by an individual
is in fact a person-to-person transaction much in the same way as with an ordinary life
insurance policy, the member does not become the owner of a policy. He simply becomes an
individual member of the retirement annuity fund set up and registered by the insurer.
4.2 RETIREMENT ANNUITY FUNDS
Retirement annuities were first introduced in this country in 1960. An amendment to the
Income Tax Act allowed taxpayers the right to deduct, in the determination of taxable
income, current contributions made to an approved retirement annuity fund up to a maximum
of, then, R600 per annum.
The amount allowable was thereafter steadily increased every few years and currently, in the
case of certain high-income earners, is virtually without ceiling, being 15% of taxable income
from non-retirement funding sources.
The introduction of retirement annuity funds has had a far reaching effect. It enabled self-
employed persons, such as professionals, the opportunity to take out individual pension
plans and obtain tax relief on their contributions.
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, RETIREMENT ANNUITIES, ANNUITIES AND SUPPLEMENTARY
BENEFITS CHAPTER 4
Before this, the advantage had been enjoyed only by employees who were members of
group pension schemes. Note that the term retirement annuity is in a way misleading, as the
annuitant does not have to actually retire before the annuity begins. As long as he is eligible
to retire, and the annuity contract has been approved by the revenue authorities, he can start
receiving a benefit.
Should the retirement annuity fund have been approved by the revenue authorities, then the
member can claim tax relief, up to certain limits, on the contributions. Contributions paid by
members are invested by the life office in its untaxed policyholder fund which is currently
taxed at 0% in accordance with the Tax on Retirement Funds Act, 1996.
In accordance with the terms and conditions of the Second Schedule of the Income Tax Act,
there is also a beneficial tax treatment of the eventual proceeds. The combination of these
tax advantages makes this type of contract extremely tax efficient. And it is therefore a good
investment, particularly for a tax payer who earns a substantial income.
Recent rulings made by the Pension Fund Adjudicator in favour of clients in respect of early
cancellations, has led to an agreement between ASISA, and the National Treasury agreeing
in principle on providing a minimum of 60% of the fund value at date of early cancellation.
4.2.1 DEFINITION AND RULES
A retirement annuity fund is defined in the Income Tax Act as
“any fund (other than a pension fund, provident fund or benefit fund) which is approved
by the Commissioner and, is registered under the provisions of the Pension Funds
Act”.
Approval should be applied for on an annual basis but, in practice, approval is automatic
from year to year, unless there is an unapproved change. Any person, whether self-
employed or not, and whether a member of any other fund, may become a member of a
retirement annuity fund.
As is further set out in the definition of a retirement annuity fund the Commissioner may
approve a fund subject to such limitations and conditions as he may determine. However, he
must not approve a fund unless he is satisfied:
(a) that the fund is a permanent fund bona fide established for the sole purpose of
providing life annuities for the members of the fund or annuities for the dependants or
nominees of deceased members; and
(b) that the rules of the fund provide:
(i) for contributions by the members, including contributions made by way of
transfer of members’ interests in approved pension funds or other retirement
annuity funds;
(ii) that not more than one-third of the total value of any annuities to which any
person becomes entitled, may be commuted for a single payment, except where
two thirds of the total value does not exceed R50 000;
This means that if the fund value is less than R75 000 at retirement, the member
can be paid the full amount as a lump sum, and does not have to invest two
thirds of it in an annuity.
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