TRANSFERS OF RETIREMENT FUND BENEFITS
By Anita Roodman: Senior Manager, Legal and Technical and Adel Grabe: Legal and Technical Specialist
The transfer of benefits of members and pensioners of retirement funds to other retirement funds is allowed in certain circumstances, subject to the provisions of the Pension Funds Act and the Income Tax Act.
Transfer before retirement
(In an occupational retirement fund, the period before a member retires from employment. In a preservation fund or retirement annuity fund, the period before the age of 55.)
- Active members of an occupational retirement fund
Any transfer of contributing members’ benefits between two occupational retirement funds must comply with the provisions of section 14 of the Pension Funds Act and Conduct Standard 1/2019. No tax is payable in respect of these transfers.[1] The transfer of a portion of a member’s pension interest to a non-member spouse’s chosen fund does not fall within the ambit of section 14.[2]
- Upon resignation of a member of an occupational retirement fund
Upon resignation, a member becomes entitled to a withdrawal benefit from their occupational pension or provident fund. The benefit may be preserved in the same fund, taken in cash, or transferred to another pension, provident, retirement annuity, pension preservation or provident preservation fund, with no tax payable at the point of transfer.[3] The member may also elect to take a portion of the benefit in cash and transfer the balance to a preservation fund. The amount taken in cash will not be regarded as the member’s one-off withdrawal allowed in the preservation fund.[4]
Section 14 does not apply when a member exits a fund after resignation or retirement, or when beneficiaries purchase annuities following a member’s death.
Since the withdrawal of SARS Practice Note RF 1 of 2012, members are allowed to split their withdrawal benefit by transferring to more than one preservation fund.[5]
With effect from 1 March 2021, no tax is payable on transfers from pension funds or pension preservation funds to provident funds or provident preservation funds.[6]
- Members of a preservation fund and retirement annuity fund
Preservation funds
A member of a preservation fund may transfer their preservation fund benefit to their new employer’s occupational pension or provident fund, to another preservation fund or to a retirement annuity fund free of tax.[7] The transfer is subject to section 14.
Retirement annuity funds
From a retirement annuity fund to an occupational retirement fund
Such a transfer is not allowed, as members may not transfer from a more restrictive retirement fund to a less restrictive retirement fund tax-wise. In a retirement annuity fund, members are not allowed to access their benefit before at least age 55. If they are allowed to transfer to an occupational retirement fund, those members will be able to access the benefit should they resign from employment. The Income Tax Act does not allow a tax deduction for such transfers either.[8]
From a retirement annuity fund to another retirement annuity fund
Transfers between retirement annuity funds are allowed.[9] Transfers of separate contracts held by the same member in a retirement annuity fund to different retirement annuity funds are allowed with effect from 1 March 2023, provided that the value of the contract(s) being transferred to the other retirement annuity fund is more than R371 250, and if the individual is not transferring all existing contracts, the total value of the remaining contracts must be more than R371 250.
No tax will be payable on the transfer,[10] and it is subject to section 14.
Transfer on or after retirement
(In an occupational retirement fund, the period after a member retires from employment. In a preservation fund or retirement annuity fund, the period after the age of 55.)
After retirement from employment, a member may preserve the retirement benefit in the same occupational retirement fund if the rules allow for such deferral. When a member elects to start receiving the retirement benefit, the member may take a portion of the retirement benefit in cash and purchase an annuity (pension) with the balance. The portion taken in cash will be taxed in accordance with the retirement tax tables and no tax will be payable on the amount used to provide the annuity.[11] The annuity payments will, however, be taxed as income.[12]
Alternatively, any time after retirement from employment, and if the rules of the member’s fund allow this, the member may choose to transfer the deferred retirement benefit in their occupational retirement fund to:
No tax will be payable on these transfers,[15] and they are not subject to section 14.[16]
The retired member will not have the option of a one-off withdrawal from the preservation fund and the benefit will only be payable as a retirement benefit when the retired member elects to start receiving the retirement benefit from the preservation fund.[17]
No cash withdrawal is possible at the time of transfer. In terms of the Income Tax Act, only the full retirement interest (the full fund value on the date that the member elects to transfer from the retirement fund) may be transferred. In the same way, the member may not partially defer their retirement in their occupational retirement fund – only the full amount may be deferred.
After reaching the age of 55, a member of a preservation fund may transfer their retirement benefit to another preservation fund or a retirement annuity fund with no tax being payable.[18]
Legislation does not allow for a transfer of a retirement benefit after the age of 55 between retirement annuity funds or from a preservation fund to an occupational retirement fund.[19]
Transferring a deferred retirement member’s benefit in an occupational retirement fund to another occupational retirement fund is not allowed either. The concern with allowing transfers between occupational retirement funds is that the transferor and transferee retirement funds may have different rules with regard to their respective normal retirement ages. This would enable a member to access retirement benefits (as a withdrawal benefit) that were not available in the retirement fund they transferred from. In the 2023 National Budget, it was announced that National Treasury is considering allowing such transfers, provided that a deferred retirement member may only use the benefit as a retirement benefit and may never take it as a withdrawal benefit.[20]
Transfer of annuities
- Living annuities
To an insurer
A pensioner in receipt of a living annuity from a retirement fund may, if the rules of the retirement fund allow this, transfer the living annuity to an insurer.[21] The liability to pay the annuity passes from the retirement fund to the insurer and, as a result, constitutes a transfer of business from the retirement fund to the insurer, and section 14 of the Pension Funds Act will be applicable.[22]
Living annuitants may also transfer their annuity between insurers. The Prudential Authority has given standing approval in respect of transfers of living annuity policies between insurers and living annuity policies to conventional or life annuity policies, subject to certain conditions.[23]
From an insurer to an occupational retirement fund
There is no express provision in the Insurance Act dealing with the transfer of insurance business assets and liabilities from an insurer to a retirement fund. The Prudential Authority intends to propose an amendment to the Insurance Act to clarify any uncertainty in this regard.[24]
To another retirement fund
In terms of the definition of “living annuity” in the Income Tax Act, members’ living annuities in an occupational retirement fund may be transferred to another occupational retirement fund as part of a group transfer. A fund with in-fund living annuitants will therefore be able to transfer members’ benefits to an umbrella fund, including transferring living annuitants to the umbrella fund.
No tax will be payable on the transfer of a living annuity, but the transfer is subject to section 14 of the Pension Funds Act.
- Life annuities
A transfer from a life annuity to another life annuity or a life annuity to a living annuity is not allowed.[25]
Death benefits
A beneficiary who received a death benefit in terms of section 37C, may purchase a pension with the benefit if allowed in the fund rules, in which case the death benefit will be considered not to accrue for tax purposes, so no tax will be payable on the portion used to purchase a pension. No such tax concession is available on transfers to preservation funds or retirement annuity funds, as the death benefit has already accrued in the name of the member.
[1] Par 6(1)(a) of the Second Schedule to the Income Tax Act provides for the tax deduction on the benefit transferred.
[2] FSRA Conduct Standard 1 of 2019 par 18(a).
[3] Paragraph 6(1)(a) of the Second Schedule to the Income Tax Act provides for a tax deduction.
[4] Par (c) of the definitions of pension/provident preservation funds in the Income Tax Act provides that one amount can be paid to the member during the period of membership of a preservation fund.
[5] SARS Practice Note RF 1/2012 previously prohibited split transfers but this was withdrawn on 15 November 2021.
[6] Section 40 of the Taxation Laws Amendment Act of 2022 amended the Taxation Laws Amendment Act of 2021 (which initially made provision for the tax-free transfers) to clarify that no tax will be payable on pre- and post-1 March 2021 contributions to a pension fund that are transferred to a provident fund.
[7] Par 6(1)(a) of the Second Schedule to the Income Tax Act provides for the tax deduction on the benefit transferred.
[8] The tax deduction allowed in par 6 of the Second Schedule is so much of the benefit as is paid or transferred for the benefit of the person from a (i) pension fund, pension preservation fund, provident fund or provident preservation fund into any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; or (ii) retirement annuity fund into any retirement annuity fund.
[9] Definition of “retirement annuity” in die Income Tax Act, par (b)(xii).
[10] Par 6(1)(a) of the Second Schedule to the Income Tax Act provides for the tax deduction on the benefit transferred.
[11] Not included under the definition of “gross income” in the Income Tax Act.
[12] Par (a) of the definition of “gross income” in the Income Tax Act.
[13] Par 2(1)(c) read with par 6A of the Second Schedule to the Income Tax Act.
[14] Par 2(1)(c) read with par 6A of the Second Schedule to the Income Tax Act.
[15] Par 6A of the Second Schedule to the Income Tax Act.
[16] Par 18(b) of Conduct Standard 1 of 2019 states that the following are not subject to s14: “A transaction entailing a member who, on leaving the service of an employer or upon liquidation of a fund, is entitled to receive a benefit in cash or is entitled to translocate the benefit to another fund, including a preservation fund.”
[17] Par (c)((iii) of the definition of “pension preservation fund” and “provident preservation fund” in the Income Tax Act.
[18] Par 6A of the Second Schedule to the Income Tax Act provides for the tax deduction.
[19] Par 2(1)(c) read with 6A of the Second Schedule to the Income Tax Act.
[20] Once the 2023 Tax Law Bills are published, more clarity will hopefully be gained on this proposal.
[21] Prudential Communication 1 of 2021.
[22] Directive 135 read with amendment 1/2001.
[23] Prudential Communication 1 of 2021, par 3.7.
[24] Prudential Communication 1 of 2021, par 4.5.
[25] Prudential Communication 1 of 2021 confers standing approval in terms of section 50(1) of the Insurance Act only in respect of the replacement of a living annuity issued by one insurer with a living annuity issued by another insurer; and a living annuity issued by one insurer with a compulsory conventional annuity policy issued by another insurer.