Provident fund annuitization
I canvassed the harmonization of all retirement funds (pension, provident and retirement annuity funds) in 153 TSH 2015.
In essence, as from 1 March 2016, contributions to such funds are treated similarly for tax purposes. Thus provident fund contributions also rank for a tax deduction, although the compulsory two-thirds annuitization of a provident fund lump-sum benefit was deferred until 1 March 2019.
In a media statement issued by the National Treasury on 16 July 2018 it was stated that:
The draft TLAB does not contain amendments related to annuitization for provident fund members…. The process of consultation within NEDLAC is taking longer than anticipated following the release of the paper on comprehensive social security on 25 November 2016. Government may introduce further legislative amendments related to the start-date of 1 March 2019 once the NEDLAC process is completed or provides any recommendation, expected to be no later than end-October.
My bet is that this compulsory annuitization will be further deferred.
Estate duty and Living annuities
Given the increased rate of estate duty announced in this year’s Budget (25% for net estates exceeding R30 million), there is an increased interest in estate planning for high-net-worth persons.
The Band-Aid solution before 1 January 2016—when a new s 3(2)(bA) of the Estate Duty Act became effective, limiting estate duty relief to match the income-tax-deductible portion of contributions—was the purchase of a single-premium retirement annuity, which immediately converted estate-duty dutiable investments into a nondutiable investments, since the proceeds were exempt under s 3(2)(i) (145 TSH 2015).
A recent fad—which does not work—is to use the proceeds from a newly purchased retirement annuity in turn to immediately buy a living annuity, in the belief that the living annuity will escape the estate duty net, given that it is also exempt under s 3(2)(i).
The wording of the s 3(2)(bA) inclusion in an estate includes contributions to a retirement fund, to the extent that these were not income-tax deductible, and also includes an amount that was not exempt under s 10C of the Income Tax Act. Section 10C permits unused tax relief on previous contributions to a retirement fund to be claimed against an annuity.
Thus a living annuity is no solution, since the same limitations apply to it as to a retirement annuity.