It is common practice in the market that members of retirement annuity funds, upon retirement, purchase an untied annuity from an insurance company. Is this practice consistent with the Pension Funds Act and the Income Tax Act?

Firstly, NAMFISA has confirmed in writing that it is comfortable for retirement capital to be moved into an untied insurance policy that provides the annuity. Effectively, capital from a pension fund leaves the safety of the Pension Funds Act to move into an insurance policy under the Long-term Insurance Act without any formal requirements. Where the money is paid as a benefit, the beneficiary can remain in the safety of the PFA but is not obliged to do so. The PFA does not prescribe how a benefit must be paid, but the rules would.

If the money is not a benefit (i.e. a compulsory transfer), section 14 of the Pension Funds Act prescribes stringent formalities for it to move from a pension fund to any other person. A benefit is an amount accrued to the member legally entitled to it. The Income Tax Act (ITA) determines how any benefit is taxed.

Thus, if it is a benefit, it is taxable; if it is not a benefit and is moved to any other person, it must comply with the PFA section 14 requirements. Because NAMFISA has not qualified its opinion to only relate to a benefit due to a member (i.e. a voluntary transfer), it has opened the door to move pension funds without the section 14 formalities to any other person even though it is not a benefit.

Insurance companies argue that where the rules oblige the member to arrange an annuity at retirement, money due from a pension fund at retirement is not a benefit and not taxable. Inland Revenue bought the argument of insurance companies in support of being allowed to issue untied annuity policies with money derived from a pension fund and to transfer the capital tax-free upon retirement from the fund. (Note: The obligation to buy an annuity can only apply to a pension fund as it would always be optional in a provident fund.)

In essence, the status quo means that NamRA considers the capital of untied annuities as retirement fund capital and affords it the same tax preferential treatment as pension funds, even though the link between the retirement capital and the PFA was severed. In contrast, NAMFISA allows the capital to leave the PFA’s safety net without any formality.

But what about retirement annuity funds? In the definition of ‘retirement annuity fund’, the Income Tax Act sets out the benefits a retirement annuity fund may provide under various circumstances. In subparagraph (x) it states “that save as is contemplated in subparagraph (ii), no member’s rights to benefits shall be capable of surrender, commutation or assignment or of being pledged as security for any loan.” Subparagraph (ii) states “that no more than one-third of the total value of any annuities to which any person becomes entitled may be commuted for a single payment...”  The crux of the matter is the word ‘assignment’. The Oxford English dictionary defines ‘assign’ as “to give something to somebody as a share of work to be done or of things to be used…”. Another dictionary defines ‘assign’ as “allot, apportion, ascribe, transfer”. Unless the annuity is purchased from an insurer in the name of the retirement annuity fund, it would imply that the member’s retirement capital is transferred or given to somebody else.

My conclusion thus is that a retirement annuity fund cannot allow the purchase of an annuity from an untied insurance product once a member becomes entitled to a retirement benefit.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.