Binding General Resolution (BGR) 58 (issued under section 89 of Tax Administration Law 28) is now final. It follows the withdrawal of GN 18 and states that any retirement annuity must be mandatory, non-commutable, payable and based on the life of the retiring member or the value of the member’s benefit, if applicable.
It cannot be transferred, assigned, reduced, mortgaged or seized by creditors according to 37A and 37B of the Pension Fund Law. Any combination of annuity methods is allowed
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BGR 58: Buying Different Types of Annuities at Retirement
The exceptions in the definitions of the different types of retirement funds in the Income Tax Law (ITA) allow [Sars] commissioned to prescribe additional limitations and conditions for the approval of the rules of retirement funds. This discretion may be exercised whenever the commissioner deems it necessary. This BGR 58 confirms the exercise of the commissioner’s discretionary power in relation to annuities acquired upon retirement.
In essence, BGR 58 addresses three main issues regarding annuities at retirement that are left to the discretion of the Commissioner to approve, namely:
- The permitted methods of purchasing an annuity;
- Non-commutation of annuities and their payment during the member’s life; and
- Applicable creditor protection
Allowed methods to buy an annuity
GN 18 and 18A, which were withdrawn in February 2021, set out the requirements of the Sars when purchasing an annuity from an approved retirement fund:
- in the name of the retiring member; or
- in the name of the retirement fund; or
- paid directly by said retirement fund
Unlike GN 18, BGR 58 now confirms that since the withdrawal of GN 18, any combination of the aforementioned methods can be provided, and multiple annuities of each type can be foreseen in the rules of a retirement fund.
There is no longer a restriction on using multiple annuity methods to purchase retirement income.
Regulation 39 of the Pension Fund Law requires trustees to have an annuity strategy for members. The definitions of each type of retirement fund state that up to one-third of the member’s total retirement interest can be commuted into a lump sum payment and the remainder must be paid in the form of an annuity (including a life annuity). However, the provisions of the law do not prescribe whether the annuity must be provided by the retirement fund or purchased from an insurer, nor do they prescribe the nature or characteristics of said annuity.
Draft Law to Amend the Tax Laws of 2021
In addition to BGR 58, the 2021 Tax Law Amendment Bill proposes to include this right also in the ITA.
However, there is a proposed provision in the ITA (which is not in BGR 58), which will limit the principal value of each purchased annuity to no less than R165,000.
This is to avoid a multiplicity of small annuities in order to avoid annuity requirements, which would allow small annuities to be commuted to a lump sum. The implementation date is expected to be March 1, 2022.
Non-switchable, payable, and based on the life of the retiring member
BGR 58 notes that an annuity must be mandatory, non-commutable, payable and based on the life of the retiring member “or the value of the member’s retirement interest,” if applicable.
As we know, a vital annuity is switchable when the capital assets of the vital annuity reach the level of R125,000 or less.
The wording of BGR 58 has the wording “… or the value of the member’s retirement interests, if applicable”. The “member interest” is the value of the retirement benefit of the retirement fund and is not the principal of each vital annuity.
Although the terminology used should have been different, it appears that the intention is to recognize that if the principal of a vital annuity is small enough to cause the principal to fall below the de minimis amount of R125,000, then the annuity is switchable. and won. it will not be payable during the life of the beneficiary.
There is no legislation that makes a guaranteed annuity commutable. GN 16, which provided for it under certain conditions, has been withdrawn.
Therefore, a guaranteed annuity is no longer switchable during the member’s life.
Creditor protection under section 37A and B of the Pension Fund Act
BGR 58 contains the recognition that an annuity cannot be transferred, assigned, reduced, mortgaged or seized by creditors as contemplated in the provisions of articles 37A and 37B of the Pension Funds Law.
Section 37A establishes that “except to the extent permitted by this Act, the Income Tax Act, or the Maintenance Act, no benefit provided in the rules of a registered fund (including an annuity purchased or by purchasing said fund from a registered fund) insurer)) ”… They will be subject to the creditors protection provisions of the section. The commissioner interprets section 37A as applicable to all annuities that can be purchased upon retirement.
This BGR applies from February 26, 2021, until it is withdrawn, modified or the relevant legislation is modified.
Jenny Gordon is Head of Technical Advisory at Alexander Forbes Investments.