ABC of Retirement Planning

The ABC of Retirement Planning
December 2021
DISTRIBUTION ACADEMY
Table of Contents 1
Table of Contents
RETIREMENT PLANNING .......................................................................................................... 2
CHAPTER 1 ............................................................................................................................... 2
Fund features .......................................................................................................................... 2
Contributions ........................................................................................................................... 5
Defined Benefit & Defined Contribution Funds .......................................................................... 7
Preservation Funds ................................................................................................................. 8
Comparison of Retirement Funds........................................................................................... 14
Retirement Funds Summary – FROM 01/03/2016................................................................... 15
Retirement Reform – Questions & Answers ............................................................................ 20
CHAPTER 2 ............................................................................................................................. 26
PAYMENT OF BENEFITS ..................................................................................................... 26
At Death ............................................................................................................................... 26
At retirement or disability ....................................................................................................... 31
At withdrawal ........................................................................................................................ 33
Deductions from Benefits ....................................................................................................... 36
Divorce ................................................................................................................................. 38
Replacement of Fund policies ................................................................................................ 41
CHAPTER 3 ............................................................................................................................. 42
Tax on Lump Sums ............................................................................................................... 42
Tax penalty after withdrawal .................................................................................................. 45
Calculation of tax-free pre-1998 benefits (paragraph 2A formula) - GEPF ................................ 48
Severance Benefits ............................................................................................................... 51
CHAPTER 4 ............................................................................................................................. 53
Government Employees Pension Fund (GEPF) ...................................................................... 53
CHAPTER 5 ............................................................................................................................. 58
Compulsory steps when a financial planning is done for fund benefits ..................................... 58
Proof free conversion option .................................................................................................. 59
CHAPTER 6 ............................................................................................................................. 61
Investment Linked Life Annuities ............................................................................................ 61
CHAPTER 7 ............................................................................................................................. 69
Life & Term Annuities ............................................................................................................ 69

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RETIREMENT PLANNING
Chapter 1
Fund features
RETIREMENT PLANNING
The term “Retirement Fund” is a collective term, which is usually used to refer to Pension Funds,
Provident Funds, Retirement Annuity Funds and Preservation Funds.
These funds are all governed under the Pension Funds Act, except for public organisation funds (or
Government Employees’ Pension Fund (GEPF), which is governed under the Government
Employees Pension Law 1996 (GEPL).
Non-employer related (also known as retail pension benefits)

• Retirement Annuity
• Pension Preservation Fund
• Provident Preservation Fund
Employer related (also known as pension fund benefits)

• Pension Fund
• Provident Fund
Trustees
A retirement fund is a trust fund and is subject to the general legal principles applicable to trusts.
The management and operations of a fund are directed, controlled and overseen by a board of
trustees. There must be at least 4 trustees of which members elect at least 50% in each board of
trustees. The board must take all reasonable steps to ensure the interests of members are protected,
act with due care and diligence, avoid conflicts of interest and act impartially in respect of all
members and beneficiaries. Failure by the trustees to fulfil their duties properly and in the interests
of the fund may result in claims for negligence against the trustees, in which case trustees may even
be held personally liable.
The ABC of Retirement Funds

Retirement Funds 3
Retirement age
Normally a member has to be 55 years or older to qualify for retirement benefits from a retirement
fund. But subject to the rules of the specific fund, it is also possible that a member may retire up to
10 years early, e.g. if the normal retirement age is 60, a member may request to retire from age 50.
Pension fund members that are allowed to retire early in terms of the rules of their funds will still be
taxed according to the normal retirement lump sum scales. NOTE that in the case of retirement from
a Provident Fund before age 55, there will be serious tax implications, as provident fund members
will be taxed according to withdrawal tax scales at retirement before age 55.
In event of disability members younger than 55 could be allowed to receive early retirement benefits.
There is no maximum retirement age.
Members may retire at any age after 55 from non-occupational retirement funds (Retirement
annuities and preservation funds), unless the rules of the fund provide for a specific maximum
retirement age.
Employer-related funds specify a normal retirement age for specific groups of employees, and early
or late retirements are dealt with in terms of the rules of the fund.
Availability of benefits
Retirement fund benefits only become payable under the following circumstances
• Death
• Disability
• Retirement (including retrenchment/ severance benefits)
Or
• Withdrawal (resignation or dismissal)
Taxability of benefits (see TAX ON LUMP SUMS for the tax tables and other information)
All lump sum payments from approved funds (i.e. other than unapproved group life schemes) will be
taxed in accordance with either the withdrawal tax table, or the retirement tax table, depending on
the reason for the lump sum payment.
Annuity income payments will be subject to income tax at the member’s marginal tax rate (unless
exempted in terms of previously disallowed contributions concession).

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Provident Funds - Implementation date: 1/3/2021
Provident & provident preservation funds

• Commutation upon retirement will be subject to the same limits as pension and RA funds
• only one-third may be commuted at retirement / disability
• Balance must be used to buy compulsory annuity income
• Commutation threshold - Where the fund interest portion consisting of provident fund
contributions from 1 March 2021 plus growth does not exceed R247 500 the full value may
be commuted
• Vested rights of current members will be protected
• Accumulated fund interest at 28/02/2021 plus growth thereon may still be commuted
in full
• Only the fund contributions from 01/03/2021 will be subject to the maximum
commutation of one-third
• Vested rights will remain when transferred to another retirement fund
• Members aged 55 or older on 1/3/2021 will be able to commute in full their total retirement
fund interest including contributions from 1 March 2021 plus growth.
• Where members aged 55 or older transfer to another retirement fund, only the vested
rights from the transferring fund are protected – i.e. vested rights will not apply to post
1/3/2021 contributions in the new fund

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Contributions
Contributions
Contributions to retirement funds are tax-deductible either for employer or employee or both, subject
to certain limits.
Changes in respect of contributions from 1 March 2016
Contributions to all retirement funds, irrespective of whether it is (pension, provident and retirement
annuity funds) have been treated equally as from 1 March 2016.
Total contributions made by an employee and his employer to pension, provident and RA funds are
added to the employee’s taxable income as fringe benefits, but are tax deductible by the employee.
All fund contribution deductions resort under one section (Section 11F).
For individuals the maximum annual deduction from their taxable income is 27,5% of remuneration
or taxable income, whichever is the greater, with an actual monetary limit of R350 000 p.a. in terms
of section 11F. Employers can still deduct their contributions under S11(l).
See below for an example of how the deductible portion of retirement fund contributions in terms of
s11F is calculated.
The taxable fringe benefit value will differ in respect of contributions to defined benefit and defined
contribution funds.
Approved risk benefits that are offered as part of a retirement fund will be regarded as a defined
benefit component. Fringe benefits resulting from the employer contribution to risk benefits from
approved funds as well as employer premiums to unapproved risk benefits will be taxed the same,
irrespective of whether the risk benefits are provided by the employer or the fund.
Up to 1 March 2016 the contributions to the different types of retirement funds had been treated
differently.

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From 1 March 2016

Employer contributions to an employee’s retirement funds (pension, provident or RA) are
uncapped, and can be deducted under S11(l) as employer expenses. However, since these
contributions will be taxed in the hands of the employee as fringe benefits, where it will be subject
to limits, employer contributions are unlikely to be excessive.
Excess contributions that were not allowed during the previous tax year can be fully deducted in
the next tax year if it falls within the limit of the annual deduction, and any excess is then carried
forward to the next tax year. The R1 800 deduction for arrear contributions fell away on 1/3/2016,
as excess contributions carried forward have formed part of the annual contribution since then.
Alert Estate Duty
The lump sum as well as the compulsory life annuity deriving from retirement funds at the death of
a member, is currently exempt from estate duty. However, any retirement fund contributions made
on or after 1 March 2016 that are used to reduce the taxable lump sum amount at death, will be
dutiable in the estate of the life insured who dies on or 30 October 2019.

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Defined Benefit & Defined Contribution Funds

Pension and provident funds are either defined benefit or defined contribution funds.
There are still many defined benefit funds in existence, but most new funds are implemented as
defined contribution funds.
Defined benefit fund

Benefits at retirement are determined by a formula as set out in the fund rules.
The formula = x% x salary x years of service.
Example:
Membership term = 20 years
% of income in terms of the rules = 2%
Benefit = 20 x 2% = 40% x salary
Actuary’s value defined benefit funds every 3 years to ensure that there is sufficient money to pay to
the members. If investment returns were poor, the employer must make additional contributions to
the fund. The employer carries the full risk that the money will be available at retirement.
Defined contribution fund

Benefits at retirement are determined by the investment performance of the fund. Members can
choose the underlying investment portfolios annually. The employee carries the full risk.
Comparison between defined benefit and defined contribution funds

Defined benefit Defined contribution
Retirement benefits Determined by a formula, e.g. Retirement value is the fund value
2% x years of service x salary at retirement. Investment
performance and contributions
determine fund value.
Resignation benefits Determined by a formula linked to Fund value at resignation.
years of service.
Risk Fund benefits are calculated Employees may choose the
according to the fund rules and are underlying investment portfolios.
guaranteed by the employer. The The employee carries the
employer carries the investment investment risk.
risk.
Pension increases The trustees decide this and it is Depends on the choices made by
after retirement. normally a percentage of inflation. the member at retirement.

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Preservation Funds
A preservation fund is a pension or provident fund, which has been registered with Registrar of
Pension funds and approved by the SARS.
It is a fund in which employees, who leave the service of an employer owing to dismissal (including
retrenchment) or resignation, or in the event of the dissolution of the employer’s pension or provident
fund, may invest their accrued fund benefits. Benefits accruing to former spouses of mem bers of
approved funds in terms of a valid divorce decree may also be transferred to preservation funds.
A member’s accrued benefit in a specific provident or pension fund may not be transferred to more
than one preservation fund, but the benefits may be divided between a preservation fund and an RA
fund.
The following are retained (preserved) in a preservation fund until retirement:

• Accrued retirement benefits
• The tax-free pre-1 March 1998 portion of public sector fund benefits (such as the government
and local authorities).
Withdrawal from a preservation fund

Full withdrawal: The rules of a preservation fund allow members (employees) to withdraw once
from the fund at any stage before the chosen retirement age if the rules of the transferring fund do
not prohibit this. This withdrawal will be subject to lump sum withdrawal tax.
The accrued benefit from a preservation fund may be taken in full in cash, subject to any restrictions
from a transferring fund, (e.g. if the money was transferred from the GEPF, no more than one-third
of the transfer value may be taken as a withdrawal before retirement).
Partial withdrawals are also allowed. If the member has made one withdrawal from the preservation
fund, he/she will not be allowed to do so again before the normal retirement age, or disability or
death, or at formal emigration.
Allowable transfers at withdrawal from a preservation fund

• The value of the withdrawal interest will be determined on the date on which the member
elects to withdraw / transfer.
• Transfers from a preservation fund to another preservation fund.
(From 1 March 2021 a tax-free transfer from a pension / pension preservation fund to a
provident / provident preservation fund is allowed).

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• Transfers from a preservation fund to a retirement annuity fund. Such a transfer is tax-free
from 01/03/2012. SARS also does not regard such a transfer as the member’s one and final
withdrawal from the preservation fund
Retirement from Preservation Funds

Retire from pension preservation funds: Members may take up to one-third of the retirement
interest in cash, subject to lump sum tax at the retirement scales. The balance must be used to
purchase a compulsory annuity (or “qualifying annuity”, as it will be known as going forward).
Retire from provident preservation funds: Up to 1 March 2021 members were allowed to
commute their full fund value, i.e. take the full fund value in cash after lump sum taxes.
From 1/3/2021, any new contributions (i.e. post 1/3/2021) plus growth thereon are subject to the
same commutation rules as pension, pension preservation and retirement annuity funds.
Investments accumulated up to 1 March 2021 will be protected, and is known as the vested portion.
ADVICE ALERT
Cost implications of withdrawals from preservation funds
Where a withdrawal is made soon after transfer to a preservation fund, the alteration charges
could be significant. In addition to the lump sum taxes payable on the withdrawal amount, these
expenses could significantly reduce the net amount. If it comes to the attention of the
intermediary that the member intends to exercise a withdrawal immediately after transfer,
he must disclose the consequences.

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Sanlam Intermediaries should request a special NUB quotation from Sanlam Life before the
preservation fund plan is issued. In terms of the special quote no commission will be levied on the
planned withdrawal amount, and neither will the increased allocation (“sizzler”) applicable to
preservation fund plans be applied to the withdrawal amount. In this way the charges to be levied
against the withdrawal amount will be lowered.
WITHDRAWALS FROM PRESERVATION FUNDS – PRACTICAL QUESTIONS
GEPF-benefits – If an ex-GEPF member has previously transferred his benefits to a

preservation pension fund, and he now wants to transfer it to another preservation fund
(e.g. from a Stratus Preservation Pension Fund to a Cumulus Echo Pension Preserver), will
his pre-1998 tax free benefit remain intact after the 2nd transfer?
Yes. As from 1 March 2018, a second transfer is allowed. If a member of a public sector fund has
transferred to a pension or pension preservation fund after 1 March 2009, and now transfers to
another pension or pension preservation fund after 1 March 2018 (2nd transfer), he will still be
entitled to the deduction of the tax-free amount determined under the formula in par 2A.
At early withdrawal from a pension or provident fund, may a fund member take a cash
portion and transfer the balance to a preservation fund?
Yes, as from 01/03/2011 partial transfers to preservation funds are allowed (except for GEPF
members, who may only transfer the full benefit, or nothing).
Preservation fund members are only allowed one withdrawal before retirement. Do the
following events count as a first withdrawal?
• Payment to an ex-spouse in terms of a divorce decree.
• Payment of an outstanding home loan or guarantee for a home loan that was
secured by the retirement fund.
• Payment of liability where the member signed an acknowledgement of debt to his
employer or the latter obtained a verdict against him for theft, fraud or
dishonesty.
No, the above events will no longer count as the only withdrawal allowed from the fund. The
member will still be allowed to make one final withdrawal from the preservation fund.

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What is the maximum that can be withdrawn from a preservation pension fund before
retirement?
Any amount up to the full fund value as determined by the Administrator may be withdrawn (GEPF
excluded, as they are limited to a maximum withdrawal of one-third of the transfer value).
May the member of a preservation fund withdraw cash after age 55, before retirement?
Yes, withdrawals after age 55 are allowed. This means that a member of a preservation pension
fund can withdraw his full benefit in cash if he chooses to withdraw rather than retire from the fund
(and pay taxes based on the withdrawal scales on the full amount)
An employer no longer has to register as a participating employer of the preservation fund.

What are the implications?
The employee can transfer his/her pension benefits to any preservation fund of his/her choice.
Non-member spouses may now also transfer the portion allocated in terms of a divorce settlement
to a preservation fund.
What are the risks involved for a client that wants to make a withdrawal soon after his fund
value was transferred to a preservation fund?
The withdrawal value could be lower than the original transfer value, because of one or more of the
following factors:
• Initial marketing charge
• Monthly plan charge
• Administration charge
• Alteration charge
• Transaction charge
• The unit price fluctuation
• The difference between the buy and sell price of the chosen investment fund(s)
• Even if a cautious or conservative investment portfolio, e.g. the Sanlam Alternative
Income Fund, was chosen there is still a risk that the unit prices of the underlying
investment funds could be lower on the day of withdrawal than on the day of transfer.
May a transfer from a pension fund or preservation pension fund be split between more
than one fund?
No. A benefit derived from a pension fund or pension preservation fund may not be paid or
transferred in such a way that it is split between more than one pension preservation funds.
Transfers from pension preservation funds may only be made to:
• One pension fund

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• One pension preservation fund

• One retirement annuity fund
• A combination of one pension preservation fund and one retirement annuity fund
• A combination of one pension fund and one pension preservation fund
• A combination of one pension fund and one retirement annuity fund.
Emigration: May members of retirement annuity funds and preservation funds (retail funds)
withdraw their fund values when they emigrate?
Up to 1 March 2021, members were allowed to terminate their membership of the fund, and make
a full withdrawal subject to lump sum tax, upon proven emigration or at expiration of a SA work
visa for non-SA citizens. This applied to RA funds from 1 March 2018 and to preservation funds
from 1 March 2019.
New
However, from 1 March 2021 the immigration rule was replaced by a residency rule. Members
younger than 55 years old have to provide proof of non-residency for an uninterrupted period of
three years before they will be allowed to make a full withdrawal from their retirement annuity
funds, or in the case of preservation funds, if they have already utilised their once-off pre-
retirement withdrawal. Members younger than 55 that had not already utilised their once-off pre-
retirement withdrawal option will be allowed to make a full or partial withdrawal from the
preservation fund. Pension and provident fund members younger than 55 will be allowed to make a
full or partial withdrawal of their resignation benefit. If the member is 55 years or older, they could
choose to retire from any of their funds, subject to the normal restrictions (1/3 limitation). Members
younger than 55, or older members that choose to withdraw instead of retire, will be subject to the
withdrawal tables for lump sum withdrawals. Members that are 55 years old and choose to retire
will be subject to the retirement tables.
What are the options available to a fund member that has to retire in terms of his
employment contract, but does not want to start receiving a pension from his date of
retirement (in other words he wants to delay his retirement from the fund)?
At retirement a person can elect not to retire, and can choose to

• remain as paid-up member of his employer’s pension or provident fund, until such time as
he instructs his fund to start paying a pension (or transfer to a retirement annuity or
preservation fund)
• transfer the full value to a retirement annuity fund (effective from 1 March 2018)

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• transfer the full value to a pension or provident preservation fund (as applicable) (effective
from 1 March 2019). Note that the member will not be allowed to make a one-off pre-
retirement withdrawal, but will have to retire if he wants to access part or all of his capital in
the preservation fund

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Comparison of Retirement Funds
Comparison of Retirement Funds
Retirement funds must apply to the Registrar of Pension Funds for registration under the Pension
Funds Act. Upon registration a fund becomes a legal person. In order to qualify for various tax
concessions for the fund and its members the fund must also be approved by the Commissioner
for the South African Revenue Service (SARS).
What follows is an attempt to highlight some of the main differences and similarities between
pension funds, provident funds, pension preservation funds, provident preservation funds and
retirement annuity funds that have been registered and approved as aforementioned.
Membership of a pension or provident fund is a condition of employment of many employers and

their primary purpose is to provide retirement benefits to employees when they retire.
The purpose of pension preservation and provident preservation funds are to keep until retirement
the accumulated pension fund or provident fund money of an employee who leaves the
employment of his employer before retirement.
Retirement annuity funds are primarily designed to provide retirement benefits to self-employed
people although anybody can contribute to a retirement annuity fund – even a person who belongs
to his employer’s pension or provident fund as well as a person who has already retired from
employment.
Government encourages membership of retirement funds with tax concessions.
The tables that follow compare some of the other features of the five types of retirement funds with
one another. The first table is how the tax law has worked until 29/02/2016 and the second table is
how the tax law works from 01/03/2016 onwards.

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Retirement Funds Summary – FROM 01/03/2016

From Pension Fund Provident Pension Provident Retirement Annuity Fund
1/3/2016 Fund Preservation Preservation
Fund Fund
Maximum deductible is 27.5% of the
Tax Forms part of Contribution consists of a Forms part of the maximum as described under
greater of:
deduction the maximum lump sum transfer from Pension Fund
• Remuneration* as defined in the 4 th
allowed in as described another retirement fund – no
Schedule of the Income Tax Act
respect of under Pension further contributions are made
or
member Fund to the fund
contribution • taxable income*
Subject to an overall cap of R350 000
p.a.
*excluding any retirement fund lump sum
benefit, retirement fund lump sum
withdrawal benefit and severance benefit.
Tax Where an employer pays the pension or provident fund Contribution consists of a Where an employer pays the retirement annuity
deduction contribution on behalf of its employee (member) it is a lump sum transfer from fund contribution on behalf of its employee
allowed in taxable benefit for the employee, but also with a deduction another retirement fund – no (member) it is a taxable benefit for the employee,
respect of for the employee within the limits set out in the column further contributions are made but also with a deduction for the employee within
employer above. The payment for the benefit of the employee is a to the fund the limits set out under Pension Fund. The
contributions deductible expense for the employer. The employer payment on behalf of the employee is a
deduction is no longer capped. deductible expense for the employer
Retirement Specified in the rules of the fund Anytime from age 55

date
Withdrawal Specified in the rules of the fund – normally cash and/or transfer to another fund

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*Remuneration: All income that would typically be payable by an employer (or deemed employer such as an insurer paying annuity income), and that
you would typically receive an IRP5 for. This includes salary, leave encashment, wage, overtime pay, bonus, gratuity, commission, fee, voluntary
award, lump sum payment, annuity, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise, and
whether or not in respect of services rendered.
Excluded: Lump sum payments from retirement funds & severance benefits
*Taxable income: All of the above, plus interest, offshore interest & dividends, rental income, as well as the taxable portion of capital gain.
Excluded: Lump sum payments from retirement funds & severance benefits.
Deductions & exemptions (e.g. interest, expenditure and travel expenses) must be applied, BUT NOT deductions for contributions to retirement funds,
and donations
Fund Options at WITHDRAWAL

Pension Fund Full amount in cash; or part in cash and rest as transfer to another retirement fund; or part transfer
Provident fund to a retirement annuity fund and to a preservation fund
Remain in pension / provident fund as a paid-up member (effective from 1/3/2019)
Pension Preservation Fund Cash as the one allowed withdrawal; or transfer to another retirement fund
Provident Preservation Fund Cash as the one allowed withdrawal; or transfer to another retirement fund
Retirement Annuity Fund Full cash withdrawal only if the fund value is less than R15 000 or if the member stops
contributions and can prove non-residency for 3 uninterrupted years
Future tax law changes should clarify if an earlier deduction or withdrawal from a provident fund or a provident preservation fund will reduce any
vested portion (provident fund contributions prior to 01/03/2021 or on or after 01/03/2021 to such fund for a member aged 55 or older on 01/03/2021)
that may be taken as a lump sum at retirement.

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Fund Options at RETIREMENT

Pension • Maximum 1/3 lump sum of retirement interest excluding the part of the interest in 1 below if applicable.
Fund
PLUS
If there was a transfer from a provident fund:
1. Contributions prior to 01/03/2021 to the provident fund plus growth can be taken as a lump sum.
The balance must provide a life-long pension. If the total retirement interest excluding the part of the interest in 1 above, if
applicable, does not exceed R247 500, the full benefit can be taken as a lump sum.
• Balance after lump sum used to purchase a compulsory annuity
• Defer retirement: Remain in pension fund as a deferred pensioner, or
• transfer the full amount to a retirement annuity or pension preservation fund
Provident • Full cash withdrawal, or partial cash withdrawal and balance used to purchase compulsory annuity
Fund • Defer retirement: Remain in pension fund as a deferred pensioner, or
• transfer the full amount to a retirement annuity or preservation provident fund
From 1/3/2021
1. Maximum 1/3 lump sum of retirement interest excluding the part thereof in 1 and 2 below if applicable PLUS Contributions
prior to 01/03/2021 plus growth PLUS
2. For members aged 55 or older at 01/03/2021, contributions on or after 01/03/2021 plus growth if made to the same
provident fund of which he/she was a member on 1 March 2021.
The balance must provide a pension. If the total retirement interest excluding the part of the retirement interest in 1 and 2 above
does not exceed R247 500, the full benefit can be taken as a lump sum. The rules of most provident funds provide that the benefit
is a pension, but part or the whole thereof may be taken as a lump sum

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Pension Maximum 1/3 lump sum of retirement interest excluding the part thereof in 1 and 2 below if applicable.
Preservation PLUS
Fund If there was a transfer from a provident fund:
PLUS
2. For members age 55 at 01/03/2021 it will include contributions on or after 01/03/2021 if made to a provident fund plus
growth.
The balance must provide a life-long pension. If the total retirement interest excluding the part of the interest in 1 and 2 above
does not exceed R247 500, the full benefit can be taken as a lump sum.
Provident Full cash withdrawal, or partial cash withdrawal and balance used to purchase compulsory annuity, if allowed in terms of the
Preservation original transferring fund rules
Fund FROM 1 March 2021
Maximum 1/3 lump sum of retirement interest excluding the part thereof in 1 and 2 below if applicable PLUS
1. Contributions prior to 01/03/2021 to the provident fund plus growth can be taken as a lump sum PLUS
2. For members age 55 at 01/03/2021 it will include contributions on or after 01/03/2021 if made to a provident fund of which
he/she was a member on the latter date, plus growth.
The balance must provide a life-long pension. If the total retirement interest excluding the part of the interest in 1 and 2 above
does not exceed R247 500, the full benefit can be taken as a lump sum. In such a case a member may elect to buy a pension with
the full benefit if the fund rules allow.

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Retirement Maximum 1/3 lump sum of retirement interest excluding the part thereof in 1 and 2 below if applicable.
Annuity Fund PLUS
PLUS
2. For members age 55 at 01/03/2021 it will include contributions on or after 01/03/2021 if made to a provident fund, plus growth.
The balance must provide a life-long pension. If the total retirement interest excluding the part of the interest in 1 and 2
does not exceed R247 500, the full benefit can be taken as a lump sum.

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Retirement Reform – Questions & Answers
Retirement Reform – Questions & Answers
What is retirement reform about? How does it affect the man in the street?
One of the most important objectives of retirement reform is to help alleviate old-age poverty for
individuals. Retirement reform will have far-reaching effects on the SA economy and the
government’s ability to deliver on essential related services, such as social security.
To achieve the objectives of retirement reform, measures are introduced to simplify and
standardise the retirement fund landscape, to encourage better savings and preservation, and to
offer simpler, more cost effective solutions.
The current retirement fund scene in South Africa is complicated, with different tax and
preservation rules for each type of retirement fund, namely pension, provident, preservation and
retirement annuity funds. A high degree of leakage (withdrawal before retirement) aggravates the
problem of insufficient retirement funding for individuals.
Because the design and execution of retirement reform is so complex and affects so many different
stakeholders on so many different levels, the implementation of some of the measures are often
delayed. Recently legislation had to be withdrawn at the last minute because of direct opposition.
How are individuals encouraged to save more?

Through bigger tax concessions and the availability of more appropriate products that are simpler
and more cost effective.
• Increased tax-deductibility on retirement fund contributions.
• Tax-free savings products, giving all individuals access to a savings model that is cheaper and
more flexible than traditional policies or unit trusts, with no taxation of contributions, growth or
proceeds, subject to an annual contribution cap.
• Availability of cheaper, simpler products for providing lifelong income (annuities) that will make
the choices at retirement easier for fund members.

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How will greater uniformity between the different retirement funds be achieved?
• Uniform tax treatment
• Contributions: Up until 1/3/2016, pension, provident and RA funds are all subject to
different tax rules on contributions. From 1/3/2016 all contributions (by employer and
employee) will be treated exactly the same.
• Proceeds: Thanks to previous retirement reform measures, the tax treatment of proceeds
from all types of retirement funds is now equal, with the introduction of standard tax tables
for lump sums at withdrawal and at retirement.
• Uniform rules at retirement
• Standard rules for annuitisation at retirement: Government intends to align the rules of
provident funds with that of pension and retirement annuity funds, but the actual
implementation date has been postponed more than once, due to pressure from interested
parties. Currently members of provident funds are allowed to withdraw their full value at
retirement as a lump sum, while pension and RA fund members may not withdraw more
than one-third of their fund value at retirement as a lump sum.
How are members encouraged to preserve more of their retirement savings?

• Through tax differentiation on lump sums at early withdrawal or retirement. Fund members will
pay more lump sum tax if they make early withdrawals from their retirement funds, than if they
preserve all of their fund value till retirement.
• Through the introduction of new annuitisation rules for provident funds that will force members
to use at least two-thirds of their value at retirement to buy a lifelong income (annuity).
Through reducing leakage from funds. Government has tabled its concerns about the high
occurrence of withdrawals before retirement, but to date no definite plans have been introduced yet
that will limit members’ current rights to withdraw. Currently only members of RA funds are
compelled to wait till 55 before they may access their money. Pension and provident funds allow
members to make a full cash withdrawal when they terminate membership of the fund before
retirement (for instance at resignation from the employer), while preservation funds allow members
to make a one-off full or partial withdrawal at any time before actual retirement from the fund.
These rights are still intact.

Retirement Funds 22
What are the main changes that came into effect on 1 March 2016?
1. Increased tax-deductible contribution levels

Contributions to all retirement funds (pension, provident & RA funds) of up to 27.5% p.a. of either
remuneration or taxable income, capped at R350 000 p.a., are tax-deductible. (In the case of
provident funds, it is proposed that this arrangement will only apply till 01 March 2019, when it will
be reviewed.)
2. De minimis amount
Members of retirement funds will be allowed to take their entire fund value in cash if the full fund
value at retirement is R247 500 or less on 01/03/2016. The “full fund value” includes previous
withdrawals from the same fund. (Please note that the actual implementation date may be
reviewed). In the case of life and living annuities, a full commutation will be allowed if the remaining
value of the investment is R125 000 or less.
How will these changes affect members?

The changes allow most fund members to make bigger tax-deductible contributions to their
retirement funding overall. This is a huge opportunity for anybody that wants to save more towards
their retirement provision, be it through their RA, pension or provident funds.
The only persons that may possibly be affected negatively are those with taxable earnings in
excess of R1 272 728 p.a., that have been contributing more than R350 000 p.a. before the
changes.
What are the changes that came into effect on 1 March 2021?
1. Provident fund annuitisation
Implementation of the changes were postponed till 1 March 2021.
• The intention is to give members of Provident and Provident Preservation funds the same
choices at retirement as with pension and retirement annuity funds, i.e. no more than one-third
of their fund value at retirement will be allowed as a cash lump sum, while the remaining two-
thirds will have to be used towards a lifelong pension.
• Exceptions: Vested rights will not be affected – any fund value on 01/03/2021 plus growth
thereon will be excluded from this new requirement. Only new contributions after 1/3/2021 plus
growth thereon will be subject to the new rule. Fund members that are 55 years of age or older
on 01/03/2021 will not be affected.

Retirement Funds 23
2. Tax neutral transfer from pension to provident fund

Tax-free transfer from pension to provident funds became possible from 1 March 2021.
How long will it take before the proposed annuitisation of their two-thirds will have an effect
on provident fund members?
Several years after implementation, thanks to the protection of vested rights, and the increased
ceiling for commutation. For the average fund member, it will take many years (between 5 and 15)
before the fund value (consisting only of contributions received after 1/3/2021, plus growth thereon)
will exceed R247 500. All current benefits (up to 1/3/2021) will still be allowed as a lump sum.
Why is there so much opposition to the new and proposed changes?

Sadly, many members do not understand the new and proposed changes and feel threatened by
them. Rumours have led members to believe that they will lose benefits at resignation and/or at
retirement. It is not true – members will not lose any of their fund benefits as a result of the current
legislation, neither at resignation nor at retirement. In addition, all privileges enjoyed up to 28
February 2021 will be protected (vested rights).
How are members affected by the changes, at resignation and retirement?

In the case of resignation, there has been no change to current legislation – members may still
take their entire fund value in cash, should they wish, or else choose to preserve all or some of
their fund value in another retirement fund, for instance a preservation fund.
In the case of retirement, no member will lose any fund value as a result of the new or proposed
legislation. Instead, the proposed changes will help members of provident or provident
preservation funds to preserve more of their fund value, by limiting the lump sum cash amount to
one-third of the fund value, thus ensuring that at least two-thirds of their fund value will be used to
supply a pension for life.
The changes that came into effect on 01 March 2016 and 1 March 2021 were introduced to
simplify the tax treatment and to bring fairness and uniformity between the different types of
retirement funds. All members of all funds will immediately enjoy the benefits of the new taxation
rules. The planned changes to provident fund rules would only gradually start to affect members
several years after the implementation date. Despite opposition, these changes are altogether
positive and are aimed at helping individuals to be in a better position after retirement.

Retirement Funds 24
NEW Default regulations
As from 1 March 2019, retirement funds must have the following default regulations in place. The
objective of the regulations is to force retirement funds to provide simpler, more affordable
solutions to fund members.
Default investment strategy: Every pension and provident fund must offer a default investment
portfolio to their members. Members that do not make an active portfolio selection will be invested
in this portfolio by default. This portfolio must offer a suitable investment strategy for most
members of the fund, taking their age, income, education levels and other demographics into
account.
Default preservation strategy: Members who leave their employers’ service (resignation,
dismissal or retrenchment) can become paid-up (no further contributions) members of their
pension or provident funds. Members will continue to enjoy growth on their fund value, until they
instruct the fund in writing to pay out or transfer their benefit to another retirement fund. The fund
must provide retirement benefits counselling to the member before a withdrawal benefit is paid out.
Default annuity strategy: All pension and retirement annuity funds, as well as provident funds
that allow the purchase of compulsory annuities at retirement, must have an annuity strategy in
place that is suitable to most retiring members of the fund. The default option is characterised by
low fees and simplicity.
Members will be able to choose whether they want to purchase this trustee-elected in-fund annuity,
or purchase a private life or living annuity. In other words, the availability of the default annuity
option does not reduce the members’ options, but in fact increases their options.
Where a living annuity is offered as part of the default annuity option, fund choices will be limited
and maximum withdrawal levels are likely to be much lower than the 17,5% currently allowed, to
promote sustainability of income throughout the retirement period for members. In-fund living
annuity members will not be allowed more than four underlying investment portfolios,
Members must be given access to retirement benefits counselling at least three months before
they retire.
Phased (deferred) retirement: When members of pension and provident funds reach normal
retirement age they may elect to postpone the payment of retirement benefits to a later date. They
can choose between staying on in the fund as deferred retirees, or they may instruct the fund to
transfer the full amount to either a retirement annuity or a preservation fund. They won’t be allowed
to make a one-off full or partial withdrawal from the preservation fund, but will have to retire if they
want access to their retirement capital.

Retirement Funds 25
ALERT: Consequences of the new default regulations for nominees & estate
Section 37C: A paid-up member, a deferred retiree and a member of an unclaimed benefit fund is
a “member” as defined in the Pension Funds Act. This means that at the death of such a member,
the benefits that become payable as a result of the member’s death, will be subject to the
discretion of the trustees in accordance with Section 37C, who do not have to follow the member’s
beneficiary nomination. Likewise, if the member had chosen the in-fund annuity at retirement, his
benefits that become payable at death would also be dealt with in terms of Section 37C, and not in
accordance with the beneficiary nomination or the member’s will.
It is nonetheless crucial that the member keeps the nomination updated, as this will guide the
trustees in terms of the member’s wishes.
Estate duty: Proceeds payable from approved funds as a result of the death of a member are not
included in the estate as deemed assets, and are not estate dutiable. The only exception to this
rule is in respect of previously disallowed contributions made since 1 March 2016. Any portion
that has not yet been deducted before the member’s death, and that is used to reduce the taxable
lump sum amount after the member’s death, will be dutiable in the estate of the member who dies
on or after 30 October 2019. (See estate duty below for more information)
Lump sum Tax: The benefit accrual date and the tax accrual date are two separate events.
Benefits accrue on the date of resignation / retirement, while tax only accrues when the member
makes his election. If the paid-up member dies before he has instructed the fund in writing to have
his benefits paid out or transferred, his benefit in the fund remains a resignation benefit, and does
NOT change to a death benefit. This means the paid-up member that has left his withdrawal
benefit in the fund will be taxed subject to the lump sum scales for withdrawal.

Payment of Benefits 26
Chapter 2
PAYMENT OF BENEFITS
At Death
Payment of benefits at Death
Appointment of nominee(s) to receive death benefits

Benefits at death from a retirement fund cannot be bequeathed. Members can nominate nominees
(not beneficiaries) for receiving fund benefits at their death.
There is no restriction on the number of nominees that may be appointed, and the member can
cancel or change the nominee’s appointment.
Members should revise their nominees regularly so that the trustees can be aware of their wishes at
their death.
The role of the Fund trustees at the death of a member of a retirement fund
In terms of Section 37C of the Pension Funds Act, the trustees of a fund have a legal obligation to
identify all the persons that are financially dependent on the member, and to ensure that the
benefits are distributed equitably.
If a nominee is not a dependant, the Trustees of the Fund have discretion as to whether and to
what extent; such nominee will share the death benefit with the dependants.
This means that even if the spouse is the sole nominee, the benefit can be divided between surviving
children, parents and other dependants along with the spouse. If no dependants are found within 12
months, and if there is no nominee, the full after tax benefits are paid to the estate. Trustees are not
under any obligation to follow the member’s nomination, but it does serve to make the trustees aware
of the member’s wishes.

Definition of Dependants
Section 1 of the Pension Funds Act defines “dependants” in relation to a member as:
(a) a person in respect of whom the member is legally liable for maintenance;
(b) a person in respect of whom the member is not legally liable for maintenance, if such person—
(i) was, in the opinion of the board, upon the death of the member in fact dependent on the
member for maintenance;
(ii) is the spouse of the member;
(iii) is a child of the member, including a posthumous child, an adopted child and an
illegitimate child;
(c) a person in respect of whom the member would have become legally liable for maintenance,
had the member not died
“Spouse”, (with effect from 13 September 2007) is defined as:

“a person who is the permanent life partner or spouse or civil union partner of a member in
accordance with the Marriage Act, the Recognition of Customary Marriages Act, or the Civil Union
Act, or the tenets of a religion.”
The following qualifies as a dependant:

• a child (whether a minor or major child) of the member including a posthumous child, an
adopted child and an illegitimate child
• the spouse of the member, including a party to a customary union according to indigenous law
and custom or to a union recognized as a marriage under the tenets of any Asiatic religion
• a former spouse in respect of whom the member is liable for maintenance in terms of a divorce
order
• a parent or grandparent who is no longer able to support themselves (while the member is
indeed able to do so)
• a person who was in the opinion of the trustees indeed dependent on the member for
maintenance at the time of the death of the member.
• a person in respect of whom the member would have become legally liable for maintenance,
had the member not died, (e.g. a posthumous child)

Distribution of benefits at death - Section 37C
Section 37C of the Pension Funds Act determines that benefits payable by a fund at the death of a
member, do not accrue to his estate, but should be paid as follows:
- if the member has dependants and the fund was not notified, in writing, of any nominee to
receive the benefit or a part of the benefit, the benefit is paid to the dependants in such
proportion as the trustees decide;
- if the trustees do not become aware of or trace a dependant within 12 months of the member's
death, but the fund was notified, in writing, of a nominee (who is not a dependant), the benefit
(or such portion as the member expressly informed the fund, in writing), is paid to the nominee
after a debit balance in the deceased's estate has been extinguished. (This provision applies
irrespective of when the nomination was made);
- if the member has a dependant and also designated a nominee to the fund, in writing, the
benefit (or such portion of which the fund was informed, in writing), must be paid to such
dependant or nominee in such proportion as the fund deems equitable, within 12 months of the
death of the member. (This provision applies only in respect of nominees designated after 30
June 1989.); and
- only if there is no dependant and there is either no nominee, or the member appointed a
nominee to receive only a portion of the benefit, the benefit or the remainder of it is paid to the
estate of the member, or, if no inventory in respect of the member has been received by the
Master of the High Court, the benefit is deposited in the Guardian's Fund.
Payment of Benefits at death
The nominees can opt to take 100% of the fund value in cash. The balance (if any) must be used
to purchase a compulsory life annuity. The lump sum is taxed according to the retirement tax tables
for approved funds. The life annuity is taxable as income in the receiver’s hands.
The life annuity is payable as:
• A pension for the member’s dependants at his prior death;
• At request of the dependants the full benefit at death can be commuted and paid out as a lump
sum; or
• A pension (life annuity) for the member himself; or
• A joint pension (life annuity) for himself and a dependant at disability or retirement.
• The life annuity can include optional “term certain” guarantees that will ensure payment of the
annuity for the remainder of the term certain in the event of the annuitant’s early death.

Estate duty
Benefits from approved retirement funds that become payable as a result of a member’s death are
not subject to estate duty, as they are not deemed assets in the deceased member’s estate.
Retirement fund contributions that were made on or after 1 March 2016 and that were not allowed
as a Section 11F deduction before the member’s death, will be dutiable in the estate of the life
insured who dies on or after 30 October 2019, if it is used to reduce the amount of the taxable
lump sum after the member’s death. This means that, should the beneficiary elect not to take any
cash, but instead use the full available benefit to purchase a compulsory annuity, the amount to
include as deemed property would be R0.
Example 1: A client died shortly after he had made a R5m ad hoc contribution to his RA. As he
was already making full use of the available Section 11F deduction for the tax year, the full R5m
was disallowed. His widow, being his sole dependant, elects to take the full available death benefit
in cash.
Death benefit: R12 000 000

Minus previously disallowed contribution (R 5 000 000)
= Taxable lump sum (to be taxed at retirement lump sum scales) R 7 000 000
Amount to be included as deemed property in the estate R 5 000 000
The full excess contribution of R5m that was used to reduce the taxable lump sum amount, is
included in the estate as deemed property. It cannot be utilised as a deduction or exemption in the
hands of the widow, and will fall away.
Example 2: The widow elects to take R4m in cash.
Lump sum amount R4 000 000

Minus previously disallowed contribution (R4 000 000)
= Taxable lump sum (to be taxed at retirement lump sum scales) R 0
Amount to be included as deemed property in the estate R4 000 000
The excess contributions of R4m that was used to reduce the taxable lump sum amount, is
included in the estate as deemed property. It cannot be utilised as a deduction or exemption in the
hands of the widow, and will fall away. The R1m excess contribution that was not used to reduce
the taxable lump sum amount, is not included as deemed property.

Example 3: The widow elects not to take any amount in cash, but instead to use the full death
benefit for the purchase of a compulsory annuity.
Lump sum amount R0

Minus previously disallowed contribution (R0)
= Taxable lump sum (to be taxed at retirement lump sum scales) R0
Amount to be included as deemed property in the estate R0
No portion of the excess contribution will be included in the estate as deemed property.
Why is it not appropriate to advise a client that benefits from an RA are readily available to
the client’s spouse, or dependants, or nominees in event of death?
Because of the strict regulations and procedures that must be adhered to by the fund trustees, it
takes much longer for RA death benefits to be paid out than for benefits from life policies. Trustees
must identify all possible dependants within 12 months. They must have recourse to any divorce
decrees applicable to the member (even if the ex-spouse has already died), to ensure all divorce
and maintenance orders against the member’s fund interest are paid, before the balance can be
paid out to the dependants or nominees.
Why is it important for the member to keep the retirement fund nominations up to date?
It is important for the trustees to be aware of the member’s wishes. Benefits may be paid out to
nominees as well as dependants, subject to the trustees’ discretion.

At retirement or disability
Payment of benefits at retirement or disability
In most retirement funds, disability (also referred to as Ill Health) is treated as early retirement and
therefore the same options and income tax tables as for retirement will apply.
What are the minimum and maximum retirement ages for fund members?
RA & Preservation Funds
Minimum: 55
Maximum: No maximum age applies. RA members may continue indefinitely, with or without
contributions
Pension and Provident Fund
Minimum: depends on the rules of the fund

Maximum: depends on the rules of the fund
Default regulations
From 1 March 2016 members of pension and provident funds are allowed to postpone their
retirement, disability and retrenchment benefits and become inactive members of the fund, if
the rules of the fund make provision for it. As from 1 March 2019, members will also be allowed to
stay on in the fund as paid-up members at resignation, dismissal or retrenchment.
Members that have reached retirement age may also elect to transfer their benefits to a retirement
annuity or preservation fund if they are not ready to take retirement from the fund. Only a full
transfer will be allowed (the member won’t be able to take a portion in cash, or to leave a portion
behind in his employer’s fund). If transferred to a preservation fund, a one-off withdrawal before
retirement will not be allowed.

Accrual date
As from 1/3/2015, the tax directive will apply to the tax year in which the member notifies the fund
of his election (to withdraw or retire).
The sequence of accrual will be (retirement is no longer included in the sequence)

• at the earliest of:
• An election;
• A section 37D deduction;
• A transfer to another fund; or
• Death
Retirement Annuities, Pension Funds and Preservation Pension Funds

The member may take a full commutation when two-thirds of the total fund value does not exceed
R165 000 (i.e. if the total fund value does not exceed R247 500). However, all RA policies within
the same fund (e.g. CRAF), also those that have already been paid out, will be taken into account.
The full commutation value is taxable according to the retirement tax tables.
The commutation threshold has been increased to R247 500 with effective date 1/3/2016.
Members are allowed to take the full after-taxed value in cash if the total fund value amount in the
fund is R247 500.
If you are already retired and in receipt of annuity income from a living annuity, you are allowed to
commute the amount as a lump sum, if at any time the full remaining value of the assets becomes
less than R125 000.
Provident and Provident Preservation Funds
Until 28/02/2021 the member was allowed to take up to 100% of his fund value in cash, subject to
any conditions of the transferring fund. The full cash value will be taxed according to the
retirement tax tables for approved funds.
From 1/3/2021 the cash withdrawal will be limited to one-third of the fund value, unless the total
fund value is R247 500 or less, and excluding vested rights.

At withdrawal
Payment of benefits at withdrawal (resignation or dismissal)
At early withdrawal from a retirement fund the withdrawal tables will apply (except in the case of
retrenchment, in which case the retirement tax table applies)
Withdrawals from Retirement annuity funds

Withdrawals are only possible under the following circumstances:
• Full cash withdrawal if total fund value is smaller than R7 000
• Withdrawal in terms of a valid divorce decree
• Full withdrawal upon proof of three year uninterrupted non-residency (the emigration rule was
replaced by the residency rule from 1 March 2021)
Withdrawals from Pension, provident and preservation funds

Withdrawals are only possible under the following circumstances:
• Full withdrawal as a result of the dissolution of the employer fund
• Full withdrawal as a result of the termination of pension or provident fund membership because
of resignation, dismissal or retrenchment
• Full cash withdrawal if total fund value is smaller than R7 000
• Withdrawal in terms of a valid divorce decree
• Full withdrawal upon proof of three year uninterrupted non-residency (the emigration rule was
replaced by the residency rule from 1 March 2021)
Options at resignation or withdrawal
From a pension fund

At resignation or withdrawal, the member has the following options:
a) Transfer the value of the resignation/withdrawal benefit to the pension fund of the new employer.
b) Transfer the benefit to a retirement annuity fund.
c) Transfer the benefit to a preservation pension fund.
d) Take the benefit in cash.
e) If the rules allow, take a deferred retirement benefit at his normal retirement age.
f) Transfer to a provident fund if the fund rules allow it (taxable),
g) Transfer to a preservation provident fund might become tax-free as from 1/3/2021 if mandatory
annuitisation is implemented
h) Stay on in the fund as a paid-up member

From a provident fund

At resignation or withdrawal, the member has the following options, subject to the rules of the fund:
a) Transfer the withdrawal benefit to the new employer's provident fund.
b) Transfer the withdrawal benefit to an RA fund.
c) Transfer the withdrawal benefit to a provident preservation fund.
d) Take the withdrawal benefit as a cash amount.
e) If the rules allow, take a deferred retirement benefit at the normal retirement age.
f) Take a cession on the policy if the provident fund is funded with an individual policy.
g) Take a portion in cash and transfer the balance to another Provident Fund or Retirement
Annuity.
h) Stay on in the fund as a paid-up member
Under what circumstances may a retiring member receive his full RA, pension or pension
preservation fund benefits in a lump sum?
If the total fund value on the date of retirement is R247 500 or less on or after 1/3/2016, the
member is not required to purchase a compulsory annuity, but may take the full lump sum after tax.
If you are already retired and in receipt of annuity income from a living annuity arrangement, you
are allowed to commute the amount as a lump sum, if at any time the full remaining value of the
assets becomes less than R125 000. Previously members that had retired before 1/3/2016 and
were already receiving compulsory annuity income were only able to commute their pension if their
full proceeds on the date of retirement did not exceed R75 000.
Transfers between funds
Transfers between certain funds are tax-fee, while transfers between others are taxable, as
indicated below.
Split transfers are transfers to more than one fund at the same time. Split transfers are only
allowed if the fund rules of all the applicable funds allow it. The taxability of the different parts of a
split transfer will be determined separately for each part of the transfer.
What are the tax implications at resignation, dismissal or dissolution of a fund?
• Cash withdrawals are taxed according to the withdrawal tax scale.

• No tax on amounts that are transferred to RA’s and preservation funds

• No tax on amounts that are transferred from the employer’s pension fund to the new
employer’s pension fund, or from the employer’s provident fund to the new employer’s
provident or pension fund.
• Transfers from a pension or preservation fund to a provident or provident preservation fund
are currently not tax-free. The full transfer amount will be taxed at withdrawal scales, and
only the after-taxed amount will be available for transfer.
Withdrawal benefits (2018-2020) Rate of tax
0 – 25 000 0% of taxable income
25 001 – 660 000 18% of taxable income above R25 000

660 001 – 990 000 R114 300 + 27% of taxable income above R660 000
990 001+ R203 400 + 36% of taxable income above R990 000
Example:
Withdrawal benefit R1 000 000.
Tax payable = R203 400 plus (36% of R10 000) R3 600 = R207 000.
At which occasions will it be possible for a client to access retirement fund benefits
before age 55?
• Form 1 March 2021, the emigration rule was replaced by a new residency rule, requiring
proven non-residency for an uninterrupted period of three years. The full after tax benefit
from an RA, pension, provident or preservation fund may be paid out in a lump sum,
regardless of the member’s age, and regardless of whether a previous withdrawal has
already been made in the case of a preservation fund. If no previous withdrawal was made
from a preservation fund, the member will be allowed to make a full withdrawal before
retirement.
• At disability: One-third or less can be taken as a lump (taxed as at retirement), plus a
compulsory life annuity bought with the balance.
• If a fund policy is paid up: If a member discontinues his contributions and his interest in the
fund is R15 000 or less, the full benefit may be taken as a lump sum after tax has been
deducted. If the fund operates by means of policies, the paid-up value of all the policies in
the fund (e.g. CRAF) must be R15 000 or less. Benefits in other RA funds (e.g. Sanlam
Linked Retirement Annuity Fund) are not taken into account.

Deductions from Benefits
Deductions from benefits
Benefits in retirement funds are protected, and cannot be implicated by debtors, liquidators, court
orders etc for an amount exceeding R3 000 per annum, except for claims in terms of the
• Income Tax Act
• Maintenance Act, and
• S37(D) deductions
Section 37D Deductions from benefits
The Pension Funds Act permits a fund to make the following deductions from a member or
beneficiary's benefit:
• Income tax owed to SARS
• Any amount owed to the employer in respect of:
• The outstanding balance of a housing loan granted by the fund or the amount for which
the fund is liable in terms of a guarantee in respect of a housing loan by another party to
the member.
• damage caused by theft, dishonesty, fraud or misconduct by the member and in respect
of which:
o the member acknowledged liability, in writing, to the employer; or
o a court judgment was obtained against the member.
• Any amount which the fund paid on behalf of a member or beneficiary in respect of an
insurance premium, membership of a medical scheme, or for any other purpose approved by
the Registrar of Pension Funds
• Amounts due by the member under a maintenance and /or divorce order
S 37D(4) of Pension Funds Act: Deemed accrual on date of divorce

• Court has discretion as to whether it will issue a Section 7(8) order
• Fund may only pay if the court order provides that the fund must pay
• A deed of settlement must be made an order of court
• Each fund concerned must be identifiable from the court order
• The % of the pension interest to be paid from each fund must be specified
• Copy of divorce order must be submitted to each fund

Where there is more than one deduction under Section 37D against the members’ fund interest, the
fund has to follow a prescribed hierarchy of payments, namely
• Tax on the benefit in accordance with the Income Tax Act;
• Housing loans;
• Maintenance orders;
• Divorce orders;
• Damages claims by employers caused by the member’s theft, dishonesty, fraud or misconduct;
• Arrear taxes;
• Insurance premiums / medical aid subscriptions
Will a fund member be allowed to transfer any remaining benefits in his fund to a
preservation fund, after a Section 37D deduction was made from his fund value? What are
the implications?
Yes. The remaining fund values may be transferred to a preservation fund, and these deductions
are currently not regarded as the one and final deduction. This means that the member will still be
allowed to make one withdrawal from the preservation fund before retirement.

Divorce
Divorce
Is it true that a member’s pension interest must be split 50/50 upon divorce?
No, it is not compulsory and the percentage split, if any, depends on the divorce settlement
reached.
What is a “pension interest” at divorce?

In the case of pension and provident funds (including preservation funds) it refers to the member’s
resignation benefits on the date of divorce.
In the case of RA’s it refers to the total contributions up to the date of divorce, plus 10% simple
interest p.a. capped by the fund or investment return
What is the “Clean Break Principle”?

Before this principle became law on 13 September 2007, non-member spouses had to wait until
the fund benefits accrued to the member, (e.g. at the member’s resignation, death or retirement) to
receive their portion. They were not entitled to any growth on their portion up to accrual date. Now
retirement funds are allowed to pay the non-member’s portion at divorce and the ex-spouses can
make a “clean break” with regard to the fund benefits.
Does the clean break principle apply to all divorces?

No. It only applies to divorce decrees granted under section 7(8)(a) of the Divorce Act, No. 70 of
1979.
Who is responsible for paying lump sum taxes on the amount that becomes payable in
terms of a divorce decree?
The non-member (ex-spouse) will be subject to tax.
Does the clean-break principle also apply to divorces before 13 September 2007?
Yes, this principle applies to all divorce settlements, irrespective of the date of divorce. This means
that ex-spouses who are entitled to a portion in terms of a divorce settlement may now instruct the
fund to transfer the funds to an RA or preservation fund or to make a cash payment to him/her.

How are divorce orders issued before 13 September 2007 treated in terms of tax?
No tax will be payable on any amount that becomes payable on or after 1 March 2012 in terms of a
divorce order that was issued before 13 September 2007. Previously amounts paid on or after 1
March 2009 were also exempted in terms of a transitional arrangement.
This applies to all public and private sector funds, regardless of whether or not the fund at issue
has introduced the “clean-break” principle, and regardless of the timing of the payment.
Will the ex-spouses that do not make use of this opportunity for immediate withdrawal now
become entitled to growth on their portion while it remains in the fund?
No. The ex-spouse will still not be entitled to growth on the allotted portion.
If the non-member spouse withdraws a portion from a member’s preservation fund in terms
of a divorce decree, will it count as the member’s first withdrawal?
No, the member will still be entitled to one withdrawal before retirement. And in the case of a
member that has already made one withdrawal, the fund will still make the divorce payment to the
ex-spouse.
What are the tax implications if the ex-spouse elects a cash payment?
The non-member’s pension interest is taxed in the non-member’s hands, according to the tax table
for withdrawals. Pension interest in respect of a divorce order on or before 13/09/2007 which is
paid to a non-member on or after 01/03/2009 is not taxed.
When is a divorce decree valid and enforceable?

• The divorce decree must meet the requirements of Section 7(8)(a) of the Divorce Act
• the order must specifically provide for the non-member spouse’s entitlement to a pension
interest as defined in the Divorce Act
• the order must set out a percentage of the member’s pension interest, or a specific amount
• the relevant fund which has to deduct the pension interest must be named and identifiable
• the fund must be expressly ordered to endorse its records and make payment of the pension
interest
Unless the decree meets all of these requirements, the fund is not allowed to make any payment to
the non-member spouse

Pension Interest cannot be transferred from a member’s pension, provident or RA fund to a

Compulsory annuity for the ex-spouse, since 37D of the Pension Funds Act only provides two
options: pay directly to the spouse or transfer to another fund.
Pension interest cannot be split into a cash portion to be paid to the non-member spouse and the
remainder to be transferred to another fund. Either the non-member takes the full Pension interest
as cash or the full Pension Interest is transferred to an approved fund.

Replacement of Fund policies
Replacement of Fund policies
A client has a number of RA policies and wants to know what the implications are of
consolidating them into one RA policy.
• Early termination charges of up to 30% can lead to considerable capital loss.
• Market adjustment losses will occur when transferring from a smooth bonus fund if the markets
are low and there is a difference between the book value and the market value.
• Policy fees on old policies are sometimes much lower.
• The opportunity to stagger the retirement dates from the different policies is lost.
• Built-in investment guarantees in some of the older investment funds that apply on maturity
date of the policy are lost. This guarantees a minimum maturity value of net premiums plus up
to 4.5% interest per annum.
Is it seen as a policy replacement if an RA is transferred from one RA fund to another?

Yes. When transferring a client’s benefits from CRAF to SARAF (which invests in Old Mutual
policies), it is seen as a replacement because a Sanlam policy is replaced by an Old Mutual policy
and all the required replacement documents must be completed. All the requisite FAIS
replacement documentation has to be completed.
A transfer from the CRAF to a Glacier RA is likewise seen as a replacement.
May a client change his compulsory conventional annuity policy once he has purchased it?
No. The client’s decision at retirement is final. He may not change his benefits or transfer his policy
to another fund or policy, regardless of how desperate his circumstances may be.
What are the options for a client with an ILLA (living annuity) that wants to transfer out of
his fund?
• He may use his investment value to purchase a conventional annuity, at the same or another
company.
• He may transfer his ILLA to an ILLA with another company

Tax on Lump Sums 42
Chapter 3
Tax on Lump Sums
TAX ON LUMP SUMS
Who pays the income tax on lump sum payments from retirement funds?
The lump sum is taxed in the member’s hands; therefore, the fund administrator withholds the tax
according to the directive from SARS, before paying out the benefits.
(Exception: In event of divorce any lump sum that accrues to the non-member on or after
01/03/2009 will be taxed in the non-member’s hands.)
TAXABILITY OF LUMP SUM PAYMENTS FROM RETIREMENT FUNDS
This applies to all retirement funds, i.e. retirement annuity, pension, provident and preservation
funds.
Withdrawals
Early withdrawals before retirement age, excluding retrenchment: The withdrawal tables apply
to cash withdrawals before 55 at resignation, dismissal, dissolution of funds or in terms of a divorce
decree, or at emigration. Retrenchment is excluded. The first R25 000 of a cash withdrawal is
exempt from income tax, with the balance taxed on a fixed sliding scale – If the R25 000 exemption
is used it will only be allowed once and the same applies to the part used of the sliding scale.
Calculation method at withdrawal (this excludes severance benefits):
Withdrawal benefit R
Less: Member contributions that were not deductible* and other permissible (R )
deductions
Add: Previous withdrawal benefits received on or after 01/03/09 R A
Add: Retirement fund lump sum benefits received on or after 01/10/07 R B
Add: Severance benefits received on or after 1/3/2011 R______C
Total R
Tax according to the withdrawal table R
Minus: Tax according to the withdrawal tables on A + B + C (R )
Tax now payable R
Tax tables at WITHDRAWAL (excluding retrenchments) (2018-2020)


Tax on Lump Sums 43
*Contributions previously disallowed as deductions
Contributions that have previously not qualified for the tax deduction may be added to the tax-free
lump sum at retirement or withdrawal. Annuity income purchased with unused previously
disallowed retirement fund contributions will be exempt under section 10C until the previously
disallowed contribution is used up.
Estate duty
However, any portion of previously disallowed contributions that were made on or after 1 March
2016, that is used to reduce the amount of the taxable lump sum at the death of a fund member,
will be dutiable in the estate of the life insured who dies on or after 30 October 2019.
Retirement
Retirement, death, disability and retrenchment: The retirement tables apply to retirements at 55
or older, death or disability before retirement, and involuntary retrenchment. The R500 000 at 0% if
fully used will only be allowed once. Any lump sum retirement commutations made before
1/10/2007 and any withdrawals made before 1/3/2009 will not be taken into account. This includes
any tax free lump sums of R120 000 (before 1/10/2007) and tax free cash pay outs of R1 800 at
early withdrawals (before 1/3/2009).
At retirement, the tax that was payable at withdrawals after 1/3/2009 will be recalculated at the
retirement tax scale, before it is deducted from the tax payable at retirement. The amount actually
paid at withdrawal will not be taken into account again.
Calculation method of retirement benefits at retirement / death / disability / retrenchment

(& severance benefits paid by the employer)
Retirement benefit R
Minus: Member contributions that were not deductible and other permissible (R )
deductions
Add: Withdrawal benefits received on or after 01/03/09 R A
Add: Previous retirement lump sum benefits received on or after 01/10/07 R B
Add: Severance benefits received on or after 01/03/11 R C
Total R
Tax according to the retirement table R
Minus: Tax according to the retirement table on A + B + C (R )
Tax now payable R

Tax on Lump Sums 44
Tax tables at RETIREMENT, DEATH & DISABILITY (& SEVERANCE BENEFITS) (2018-2020)
700 001 – 1 050 000 R36 000 + 27% of taxable income above R700 000
1 050 001+ R130 500 + 36% of taxable income above R1 050 000
The R500 000 tax-free amount is reduced in the event of previous withdrawals since March
2009, previous retirements since October 2007, and severance benefits since March 2011
See SEVERANCE BENEFITS below for more information

Tax on Lump Sums 45
Tax penalty after withdrawal
BEWARE OF DELAYED TAX PENALTY AFTER WITHDRAWAL FROM A RETIREMENT

FUND
Members of retirement funds must be aware of the tax penalty at retirement if they had an
amount taxed as a retirement fund lump sum withdrawal benefit before retirement. The
following amounts are defined as retirement fund lump sum withdrawal benefits:
• an amount assigned as pension interest in terms of a divorce order granted on or after 13

September 2007 which is due and payable on or after 1 March 2012 to a non- member
former spouse of a member of a fund;
• an amount transferred from a fund of which the person is a member to another fund for the
benefit of that member if the transfer is to a fund that would not allow the member a
deduction in respect of the amount transferred (e.g. transfers from a pension fund to a
provident fund are fully taxed);
• an amount received by a member in consequence of his/her withdrawal from a fund
before retirement (including a partial withdrawal where that is possible).
The following examples illustrate the tax penalty.

Example 1
A divorcee had been allocated R500 000 as a pension interest from the pension fund of her ex-
husband on 10 June 2014. She elected for the money to be transferred to her bank account
by the fund. She has not received any taxable lump sum from a retirement fund before. Tax
on the R500 000 was calculated according to the table applicable to the lump sum withdrawal
table below.
Taxable income from lump sum Rate of tax

withdrawal benefits
The tax was R85 500.

Tax on Lump Sums 46
When she retired on 30 September 2016 she commuted R1 000 000 of her pension fund
benefits. The tax thereon was calculated as follows:
Pension lump sum R1 000 000
Plus: Pension interest (divorce benefit) received in 2012 R 500 000
R1 500 000
The tax on the aggregated amount is calculated according to the current table applicable to the
lump sum retirement table below.
Taxable income from lump Rate of tax
sum retirement benefits
700 001 – 1 050 000 R36 000 + 27% of taxable income above R700 000
1 050 001+ R130 500 + 36% of taxable income above R1 050 000
The tax on the aggregated amount is R292500

Less: tax on R500 000 according to the retirement fund lump sum benefits table (R 0)
Tax on R1 000 000 = R292 500
Total tax paid on withdrawal plus retirement (R292 500 + R85 500) = R378 000
Note, it is not the actual tax that was paid on the R500 000 (i.e. R85 500) that is deducted, but an
adjusted lesser amount based on the current tables. It could even be nil if the amount taxed at the
lump sum withdrawal table was R500 000 or less. If she had the pension interest of R500 000
transferred to her pension fund there would not have been any tax payable on the transfer. If she
then at retirement withdrew the R500 000 in addition to the R1 000 000, the tax on R1 500 000
would have been R292 500 which is R85 500 less than what she is now paying in total on the two
amounts.
The same problem presents itself when a person takes a withdrawal benefit from, for instance, a
preservation fund of which he is a member, and subsequently retires. This method of revisiting tax
on a withdrawal benefit from a fund was devised by the legislator to discourage withdrawal of
retirement benefits before retirement.

Tax on Lump Sums 47
Example 2
Koos, 50, resigns on 1/10/2014. His retirement fund value is R3 000 000. He decides to take
R1 000 000 in cash and transfers the balance to a Retirement Annuity Fund.
Lump sum at withdrawal

R1 000 000
Less: Member contributions that were not deductible and other permissible deductions R0
Add: Previous withdrawal benefits received on or after 01/03/09 R0…(A)
Add: Retirement fund lump sum benefits received on or after 01/10/07 R0…(B)
Add: Severance benefit received on or after 01/03/2011 R0 (C)
Total R1 000 000
Tax according to the withdrawal table R 207 000
(Tax according to table: R203 400 plus 36 % of taxable income exceeding R990 000 =
R207 000)
At 55, when he retires, his RA value is R2 700 000. He wants to take the full available lump sum,
which is R900 000.
Lump sum at retirement R 900 000

Less: Member contributions that were not deductible and other permissible deductions (0)
Add: Previous withdrawal benefits received on or after 01/03/09 R1 000 000(A)
Add: Retirement fund lump sum benefits received on or after 01/10/07 R0.. (B)
Add: Severance benefits received on or after 01/03/2011 (C) R0 (C)
Total R1 900 000
Tax according to retirement table R 436 500
(Tax according to table: R130 500 plus 36 % of taxable income exceeding R1 050 000 =
R436 500)
Minus: **Tax already paid at withdrawal (but recalculated on retirement tables)
(Tax according to table: R36 000 plus 27 % of taxable income exceeding R700 000 = R117 000
Tax now payable (436 500 – 117 000) R319 500
** NOTE: The amount paid in taxes at withdrawal, will be recalculated at retirement, which means
that the amount deducted at retirement differs from the tax already paid (R117 000 vs R207 000).
As a result of the aggregation effect, Koos ended up paying lump sum taxes totalling R526 500
(319 500 + 207 000), whereas if he had postponed the withdrawal till retirement, his total lump
sum tax on R1 900 000 would have been R436 500 – an enormous difference of R90 000.

Tax on Lump Sums 48
Calculation of tax-free pre-1998 benefits

(paragraph 2A formula) - GEPF
Paragraph 2A formula (previously known as formula C)
“Other permissible withdrawals”

The “other permissible withdrawals” referred to in the first step of the tax calculation formula refers
to the tax-free portion in terms of membership of a public sector fund such as the Government
Employees’ Pension Fund (GEPF) before 01/03/1998.
Tax position of funds established by law

These funds also known as public sector funds include The GEPF, and certain semi-government
funds like those of Universities, including universities of technology (previously called Technicons)
and the Transnet Pension Fund.
Lump sum benefits that were received from these Funds were tax-free before 1 March 1998. As
from 1 March 1998 these benefits have been taxed in the same way as benefits from the private
sector funds, but vested rights are protected. This means that only a portion of the lump sum
related to years of service after 1 March 1998 will be subject to the tax tables.
The paragraph 2A formula is used to determine the taxable portions applicable to values
accumulated in these funds before 1/3/1998.
B
Par 2A Formula: A = XD
C
Where:
A = The taxable portion of lump sum received.
B = Years of service after 1 March 1998.
C = Total contributing service years
D = Single premium received from pension fund.

Tax on Lump Sums 49
Example
A member of the public sector pension fund retires on 31 August 2010 after 40 years’ service.
He is entitled to a lump sum of R400 000.
1/3/98
28 12
40
The total number of years to be taken into account when determining the lump sum = 40
The total number of completed years after 1 March 1998 = 12
B
A = x D
C
12 400000
A = x
40 1
A = R120 000 (taxable portion)

Thus tax free portion is 400 000 – 120 000 = 220 000
If this person has no other deductions such as previously disallowed contributions, you then apply
the retirement tax table to the taxable portion of R120 000. Therefore, if this is the only retirement
fund benefit since 1/10/2007 (thus R315 000 exemption available) this person will not be taxed on
the full R400 000.
Paragraph 2A formula and divorce

When applying for a tax directive from a public sector fund in respect of a valid divorce decree, the
non-member spouse must include the pre-1 March 1998 years of service, as the paragraph 2A
formula will be applied to either member or non-member spouses on a continuing basis. This
means that both spouses will be able to benefit from the pre-1998 benefit on a pro-rata basis. The
paragraph 2A formula calculation for the non-member’s withdrawal will only apply to the lump sum
taken and not on the full amount transferred.

Tax on Lump Sums 50
Example of calculation of paragraph 2A formula at divorce

Facts: Mr A joins Government in 1990. He remains in service until 2014. In 1992 he marries Ms D.
They get divorced in 2008. According to the divorce order, Ms D is entitled to 40 per cent of Mr A’s
retirement interest as at the date of divorce. On the date of divorce, Mr A’s retirement interest is
valued at R2 000 000. Ms D is therefore entitled to R800 000. In 2012, Ms D elects to receive the
benefit, and the retirement fund pays Ms D R800 000 less any tax liable.
Completed years of service of the member post-1998 as at date of the lump sum 14 years
becoming payable (1998 – 2012)
Total completed years of service of the member as at date of the lump sum 22 years
becoming payable (1990 – 2012)
Value of lump sum becoming payable R800 000
14 years’ x R800 000

22 year
= R509 091 (taxable lump sum for non-member ex-spouse)
Source: TLAB, 2012 Explanatory notes, CFP annual refresher workshop - FPI
Preservation of pre-1998 tax-free benefit upon transfer

Before 1 March 2018: The pre-1998 tax-free benefit was forfeited in cases of a subsequent
transfer to a second preservation fund (in other words where ex-GEPF members had transferred
their benefits to a new fund (Fund 2), and subsequently made a second transfer fund 2 to yet
another fund (Fund 3). This means that if you had transferred preservation fund money to a new
preservation fund (e.g. a Section 14 transfer from a Stratus to a Glacier preservation fund) if the
original transfer was from a GEPF fund, and it included pre-1998 money, you would have caused
your client to lose his pre-1998 tax-free benefit).
The tax-free benefit was only protected during the original transfer from the GEPF fund (from a par
(a) fund to a par (c) fund). Benefits transferred from a par (c) to another par (c) fund lost their
identity and tax-free status.
Tax losses for the member could potentially be enormous, leading to serious advice risk.
From 1 March 2018: The pre-1998 tax-free portion can now also be preserved on one additional
transfer (two in total), if the original transfer from the GEPF was done after 1 March 2009, and the
second transfer is done after 1 March 2018. (There is also a request to National Treasury that a
pension interest that was transferred should maintain the tax-free portion. But this is not a reality
yet.)

Tax on Lump sums 51
Severance Benefits
Severance Benefits
As from 1 March 2011 new tax rules apply to severance benefits. The old formulae for tax on
gratifications have been withdrawn completely.
What are severance benefits?

Severance benefits are amounts payable by the employer (they do not derive from retirement
funds) due to relinquishment, termination, loss, repudiation, cancellation or variation of a person’s
office or employment (excluding proceeds from a deferred compensation plan), and include the
following:
• Retrenchment (this includes redundancy)
• death,
• retirement (e.g. golden handshake),
• reward for long service after 55 (if it coincides with a service termination or a new changed
service contract)
Please Note:
• Severance benefits do NOT include proceeds from employer-owned policies (e.g. deferred
compensation)
• Please note that accumulated leave payment is NOT included under severance benefits, as
it will be included under income and taxed at marginal rate in the year of encashment (this
also applies at retirement)
How are severance benefits taxed?

They are combined with lump sums from retirement funds, and will be taxed at retirement scales if:
• the person is older than 55, (if it coincides with a service termination or a new changed service
contract)
• the person retires on or after 55,
• the person has become permanently disabled for his occupation,
• the person has lost his work due to retrenchment,
• or at his death
If not one of the conditions above is met, the benefit will be taxed at withdrawal scales.

Lump sum events 52
The combination of severance benefits (that must be taken in cash) with retirement benefits will
result in the depletion of the lower scales, as the client does not have an option to buy a
compulsory annuity with his/her severance benefit and so avoid high lump sum taxes).
The new dispensation will benefit lower remunerated emloyees, as they will now be able to receive
the first R500 000 of their severance benefits at 0% tax.
What will be taxed at retrenchment?

• Lump sum withdrawals from pension and/or provident funds are taxed at retirement scales
• Cash amounts payable in terms of severance benefits will be aggregated with the lump sum
withdrawal amounts and taxed at retirement scales
Can the severance benefit be taken into account when the maximum deductible RA
contribution is calculated?
No. The 2011 tax amendment law disqualified it from this 15% contribution calculation. Also bear in
mind that any lump sum benefit payable from an employer provided retirement fund that becomes
payable to the employee as a result of retrenchment, may already not be included in the non-
retirement funding taxable for purposes of calculating the 15% contribution. This is in spite of the
fact that the lump sum from the retirement fund must be aggregated with the severance ben efit for
purposes of calculating the lump sum taxes.

Government Employees Pension Fund (GEPF) 53
Chapter 4
Government Employees Pension Fund (GEPF)
GEPF
Why is the GEPF treated differently from other pension funds?

The GEPF is not governed under the Pension Funds Act; instead the Government Employees
Pension Law governs it. The latest changes to the Pension Funds Act do not apply to the GEPF.
What is the difference between a cash withdrawal value and an actual reserve?
The GEPF distinguishes between a member’s actuarial value and the cash withdrawal value. The
full actuarial value could be considerably more than the cash value. Before 1 April 2012, the
actuarial value was only available at retirement, or where the member made a transfer to another
approved fund (e.g. to a preservation fund or RA fund). If he elected to take his fund benefit in
cash, a GEPF member would only be entitled to a cash withdrawal value.
Example (before 1/4/2012): Max resigns from government service after 12 years of pensionable
service, with a final salary of R48 000 per year. If he takes a cash withdrawal, his cash benefit will
be R73 440. But if he transfers his pension value to another approved fund (RA or preservation
pension fund), his transfer value (actuarial interest) will be R118 080 instead.
Will a GEPF member receive his cash value or his actuarial value if he chooses to take his
fund benefit in cash?
As from 1 April 2012, GEPF members are entitled to the higher of the cash resignation benefit or
the actuarial interest, whether it is at retrenchment, resignation or dismissal, and regardless of
whether he chooses a cash withdrawal or a transfer to an approved fund.
Can a GEPF member make a 100% withdrawal from a preservation fund after transferring
the full actuarial value to a pension preservation fund?
NO. Only 1/3 of the fund value plus interest will be available for withdrawal. This is an important
difference between the GEPF and other retirement funds.
Advice risk: Sanlam receives many complaints from former GEPF members that are accusing
their advisers of withholding this crucial information, or of not having explained the implications
clearly enough, when they were advised to transfer to a preservation fund. The Ombud’s decision
usually hinges upon the information recorded (or not recorded) in the Record of Advice. It is crucial

that your documentation clearly reflects that this aspect has been explained to the client, and that
he understood and accepted the limitation placed upon GEPF members upon transfer to a
preservation fund.
What happens if the GEPF member does not settle all outstanding debt with his employer or
with SARS, before he resigns?
The employer or SARS will deduct the outstanding money from the member’s fund value. The
member’s options would be a transfer to an RA or preservation pension fund (while the current
concession in respect of advanced withdrawals is valid), or a cash withdrawal.
What are the implications if the GEPF transfers the funds to a preservation pension fund
after deducting outstanding debt?
Due to the practice note for preservation funds, RF 1/2012, which replaced RF1/2011 Sanlam can
allow transfers of such balances on or after 1 March 2011 and process the transaction (while the
current concession in respect of advanced withdrawals is valid),. Transfers to a preservation fund
from the GEPF are subject to the condition that only one-third may be taken in cash, which applies
to withdrawals and retirement from the preservation fund.
GEPF and Divorce
Does the clean-break principle apply to the GEPF?

(See Divorce in Chapter 31 for more information)
Yes. In terms of Section 24A of the Government Employees Pension Law Amendment Act, 2011,
former spouses of GEPF members may now apply for immediate payment of their portion of the
member’s pension interest in terms of a valid decree of divorce granted under section 7(8)(a) of the
Divorce Act, or a valid decree for the dissolution of a customary marriage.
Their portion will be deemed to accrue to the non-member spouse on the date on which the decree
of divorce or dissolution is granted. This means that where valid Section 7(8) divorce orders were
granted in the past, former spouses may now apply for their portion to be paid out with immediate
effect. The date of divorce is for purposes to claim, while the date of accrual (i.e. when the option
to withdraw or transfer the portion is exercised) will be used for tax purposes.
Former spouses may instruct the Fund to have their portions of the pension interests paid out in
cash after deduction of lump sum tax, or transferred to another approved fund. The distinction
between actuarial and cash value does not apply to their share of the pension fund interest (former
spouses will receive the full percentage or monetary value as described in the divorce decree,
provided the member’s pension interest is sufficient). This means that their share of the pension
interest is calculated on the full actuarial interest, and not on the cash value.

The former spouse has to choose either a full cash or a full transfer (no partial cash withdrawals
and transfers are allowed).
Any previous maintenance or divorce orders will first be deducted from the member’s fund interest
before effect can be given to the new decree.
The “clean-break” principle was first introduced in private sector funds. From 1 March 2012 all
public sector fund members are also subject to the “clean-break” principle.
How is divorce debt treated for GEPF members? NEW

As the GEPF is a defined benefit fund, where member benefits are based on a formula that
includes the final salary and number of completed service years, the pension interest cannot
simply be reduced by the amount paid out to the former spouse in terms of a valid divorce decree.
As from 1 August 2019, the member’s service years is reduced in line with the value of the divorce
payment. Before this date, the payment was treated as an interest-bearing debt, with the accruing
interest having a devastating effect on the member’s retirement benefit, especially over a long
term.
Example of how the reduction of service years will affect the member’s pension interest:
Member’s actuarial value in the Fund at date of divorce: R2m
Pensionable service years: 20 years
Amount payable to former spouse in terms of divorce decree: R800 000 (40% x R2m)
Pensionable service years are reduced by 8 years (40% x 20 years)
Par 2A (previously known as Formula C) and divorce

When applying for a tax directive from a public sector fund in respect of a valid divorce decree, the
pre-1 March 1998 years of service should be included also in the case of the non-member spouse,
as the paragraph 2A formula will be applied to either member or non-member spouses on a
continuing basis. This means that both spouses will be able to benefit from the pre-1998 benefit
on a pro-rata basis.
How will the pension interest be impacted if divorced member has pre-1998 service years?
The pensionable service years will be reduced proportionally from both the pre-1998 and post-
1998 years. For instance, if the member in the example above has 25 service years (5 from pre-
1998 and 20 from post-1998), then the pre-1998 years will be reduced by 2 years (40% x 5 years),
and the post-1998 years will be reduced by 8 (40% x 20 years).

For more information, please see Calculation of tax-free pre-1998 benefits (or Formula C or
par 2 (1)(a)) above.
Effect of 2016 tax & legislative changes on members of the GEPF

Will a GEPF member be allowed to retain his pre-1998 tax-free benefit if he transfers his
fund value to a preservation pension fund, or a new employer fund? Does it matter how
often he makes a subsequent transfer to another fund?
Yes and yes. When a GEPF member transfers his money to a preservation pension fund or a new
employer pension fund, his pre-1998 tax-free benefit will be preserved in the new fund (Fund 2) if
the fund rules allow for it. Up to 1 March 2018 this benefit would have been forfeited if the member
had made another transfer to a new fund (Fund 3), e.g. from a Stratus RA to a Glacier RA.
NEW
But as from 1 March 2018, the tax-free benefit will be preserved for one additional transfer (a
second transfer), if the original transfer from the GEPF was done after 1 March 2009, and the
second transfer is done after 1 March 2018. (There is also a request to National Treasury that a
pension interest that was transferred should maintain the tax-free portion. But this is not a reality
yet).
Do the 2016 changes hold any benefits for GEPF members?

Yes. In the past few GEPF members enjoyed tax deductions on RA contributions in excess of
R150 pm. But now members can deduct up to 27.5% of their annual income, capped at R350 000
p.a., for contributions to pension, provident and RA funds. This is a huge opportunity to address
the shortages at retirement.
Will the proposed changes in respect of mandatory annuitisation for provident fund
members have a negative impact on the fund benefits of GEPF members?
Absolutely not. Members of the GEPF can rest assured that their benefits are in no way impeded
by any actual or planned changes. It is not in any member’s best interests to resign from their
funds in order to access their benefits.
1. GEPF members belong to a defined benefit fund. As such their benefits are defined in
terms of fixed formulas, and must be paid out in accordance with the Fund rules. This
means their benefits are safe.
2. Benefits at withdrawal are not affected by the latest legislation. Members may still choose
to withdraw their entire resignation value in cash, if they wish, or alternatively transfer all or
part of the benefit to another retirement fund, e.g. a preservation pension fund.

3. Benefits at retirement are not affected, as the GEPF is a pension fund, and as such GEPF
members are already required to use at least one-third of their fund value at retirement
towards a lifelong pension. Only provident fund members will be affected by the change as
their fund rules are being brought in line with that of pension and retirement annuity funds.

Compulsory steps when a financial planning is done for fund benefits 58
Chapter 5
Compulsory steps when a financial planning is
done for fund benefits
Compulsory steps with fund benefits
When benefits become due from a retirement fund or group scheme due to a member’s death,
disability, retirement, resignation, dismissal or retrenchment, there is a duty on the financial advisor
that is assisting him /her with the financial planning to make sure that the client is fully informed of
all the options available to him /her or the dependents /nominees, and of all the implications of the
available options.
The financial advisor may not rely on the assumption that the member’s fund or employer would
have ensured that the client or his /her dependents is aware of and understands all the options.
The fact that the fund or employer may have communicated the information to the member or
dependents is likewise not proof that the information was understood.
Steps that must be followed during the financial planning process when a client is about to
receive benefits from a retirement fund or a group scheme
1. Get a copy of the client’s latest member benefit statement
2. Get a copy of the rules of the fund / scheme, or else a quote issued by the fund/scheme that
contains full information regarding all the options available to the client
3. Explain all such options available to the client
4. Ensure the client / dependents understand the implications of all the different options
This includes, but is not limited to,
a. Cash options
b. Transfer options
c. Income options
d. Tax implications
e. Conversion options
f. Purchasing a pension privately (e.g. through Glacier) vs receiving a pension directly from
the fund (e.g. GEPF and most other defined benefit funds)
5. Ensure the client / dependent is in a position to make an informed decision!
As funds are legally obliged to make a copy of the fund rules available to their members, the
excuse that the rules were not readily available will not be acceptable. However, if obtaining the
rules proves impossible, advisors should consult their market specialist or manager for help or
more information on the specific fund.
Proof free conversion option – See below

Proof free conversion option

Proof free conversion option
When a member retires or withdraws, he may be entitled to certain conversion options on some of
the risk benefits in the fund or group risk scheme. As the insurer underwriting the fund’s risk
benefits is already carrying the risk for the member, the member may at termination of his/her
membership, ask the fund to transfer this risk to an individual policy in the client’s name, with the
same insurer.
The major advantage of this benefit is the fact that the client qualifies for continued cover
regardless of his/her health status. (Most insurers require a HIV-test though). This is an invaluable
benefit for clients in poor health, or clients that still need major benefits for business, credit or
estate purposes.
The major drawback is the fact that the policy is likely to be more expensive than the original
benefit, as the client will be paying market related individual rates for the cover, instead of group
rates.
The conversion options most frequently apply to death benefits, but are also frequently offered on
lump sum and income disability benefits. Because it is an expensive benefit, not all funds will offer
the benefit. It becomes more expensive in line with the underlying risk that is covered, e.g. a
conversion option on a trauma benefit will be more expensive than on a lump sum disability
benefit.
Some funds also offer conversion options on the spouse cover under the scheme, that could be
exercised at divorce, death, withdrawal, retirement or benefit cessation age of the member.
The conditions will vary from fund to fund. The fund rules have to be consulted to make sure
whether the option applies at retirement after age 56, or at disability, or at resignation, or at any
other event applicable to the member.
It is general practice to allow one to two months after the member’s last working day to effect the
new policy in terms of the option.

The proof free cover does not apply to any new cover amount exceeding the original fund cover, or
to any additional benefits that were not part of the original benefit. Any excess cover or additional
benefits will be fully underwritten according to the current new business rules, and the normal
HIV/AIDS limitations and conditions for new business will usually be imposed on the new policy.
Advice risk
An advisor that fails to discuss the conversion option with the client or his/her dependents exposes
him- or herself to advice risk. For instance, should the client die, and a conversion option was
available but there is no evidence that the conversion option had been discussed with the client,
the advisor can be accused of negligence and Sanlam can be sued for damages. There has to be
evidence that the client or his / her dependent was in a position to make an informed decision.
Therefore, the advisor must make a note in the Record of Advice that the client has declined the
option after the benefits had been explained to him / her.

Investment Linked Life Annuities 61
Chapter 6
Living Annuities
Living Annuities (also called Investment Linked Life Annuities or ILLAs)
An Investment Linked Life Annuity can only be bought with compulsory money. It is the most
popular choice for the provision of privately purchased retirement income today, but rife with risks.
An advisor must not only understand all the associated risks, but also his responsibilities.
The main elements of a living annuity are:
• You must draw a monthly pension. The income you draw must be between 2.5% and 17.5%
percent of the annual capital value of the annuity. You must review the annuity amount every
year.
• When you die, the residue of your investment is passed on to your beneficiaries. The residue
can be passed on as an ongoing annuity to generate an income, or as an accelerated annuity
that pays out all the capital and investment growth over five years, or can be commuted to one
lump sum withdrawal.
• If the residue is taken in the form of an income, it will not be taxable in your estate, but will be
treated as income in the hands of your beneficiaries, who will be taxed at their marginal tax
rates. If the residue is commuted to a lump sum, the full value of the lump sum will be subject
to the retirement fund withdrawal tables, and will be deducted from the value of the investment
before it is paid out to the nominees.
• You are in charge of the underlying investment choices. You can select and change the
underlying investments at your discretion within the basket of options offered by the linked
investment product company. The investment choices are wide, but are mainly based on a
spread of unit trust funds or multi-manager funds, which are compiled with different investment
risk profiles.
• You take the risk that there will be enough capital to maintain your standard of living until you
die.

Understand the risks
You face a number of risks when you manage your retirement funds through a living annuity.
These risks include:
• Inflation risk: If inflation rises at a faster rate - or even at the same rate - as your investment
returns, you will be forced to reduce your standard of living.
• Advice risk: This is one of the biggest hazards of living annuities, particularly if you have little
investment knowledge. Many people have placed their retirement savings in high-risk
underlying investments on the basis of poor investment advice. When you take the living
annuity route, you must make sure that the person or organisation advising you is qualified to
do so.
Living annuity investments are complex, so it is probably better to use an organisation rather
than a one-person operation. The organisation should have a strong back-up team that uses
sound methods of investment analysis and has the capacity to provide you with ongoing
advice for the rest of your life.
You should also expect to pay for advice that will bring you superior investment performance.
Commissions/fees are negotiable, but they tend to be significantly higher than those charged
for traditional annuities.
• Market risk: This is your biggest risk. You can never be sure if investment markets will move
up or down, despite the fact that, historically, investors have received real returns from
investment markets over the medium to long term. What you must remember is that you will
be drawing capital against the investment growth, so sustained market downturns will have a
serious effect on your investments. Share markets are more volatile than other asset classes.
In other words, they go up and down in value faster and more dramatically. This volatility, if
you are fully invested in shares rather than being properly diversified, can have devastating
effects. The danger lies in continuing to draw capital during the down phase of the market,
and so having a smaller base from which to grow your capital during the next market upturn.
Here is an example of how things can go very wrong: Assuming you bought a compulsory
purchase annuity with R1.2 million in 2006. You require an income of R10 000 a month, but in
2007 the market crashed and you lost 25 percent of your investment. The market then levelled out
but remained down for three years. This illustrates what can happen - and what has happened to
many people in a prolonged bear market.

At the start of year four, your capital will be reduced to say R540 000. You will have to reduce your
income to R7 875 a month, because you are not allowed to withdraw more than 17.5% of your
capital value.
Factor in an average inflation rate of 6 percent over the three years and you have a real problem.
Not only has the R1.2 million been reduced to R540 000 in nominal terms, but the after-inflation
effect reduces the value to R453 400.
You could, however, have provided some protection for your capital after the market crash by
reducing your income from a 10 percent withdrawal - R10 000 month - to the permitted minimum of
2.5%. This would have given you a monthly income of R2 500.
Understand the costs
The costs you pay for living annuities come in layers. They include:
• Initial costs: These costs are based on a percentage of the assets you are investing and
include an initial commission. Total initial costs may be as high as six percent, depending on
the size of your investment.
• Annual costs: You pay a percentage of the value of your assets annually, which includes a trail
commission to your financial adviser. These could total as much as 2.5 percent.
• Annual performance fees: Some linked product companies charge a fee if they out-perform
their investment benchmarks.
• Transaction costs: You are entitled to switch your investments at a fee of about 0.25 percent of
the amount of the transaction.
• Underlying costs: You could pay initial investment charges on the underlying investments, as
well as annual asset management fees.

Understand the management
Linked product companies that allow you to mix and match the underlying investments manage
most living annuities. The living annuity itself is a life insurance product issued by a life insurance
company (usually one associated with the linked investment product company).
Before you enter into any living annuity contract, make sure that you know the following:
• The cost structure and the right of the annuity provider (the life insurer and/or the linked
investment product company) to change these costs. You should insist on these costs
remaining unchanged.
• The level of service you can expect, in particular how long it takes to execute an instruction.
• The underlying investment options and the right of the linked investment product company to
limit these options. You must know how such changes will affect your investment portfolio.
• Your right to switch to another life insurer if any of the original terms and conditions of the
contract are changed, the service is poor, or the costs are increased. By law you may change
your life insurance company (and the linked investment product company), but it may mean
that you will have to pay a penalty. Life insurers must enter into mutual agreements before a
change is permitted.
The draw-down percentage can be adjusted annually.
Your Investment Linked Life Annuity (ILLA) allows you to choose an income level of between 2.5%
and 17.5% per annum. In order to prevent possible capital erosion over time, it is suggested that
you limit your income to the following withdrawal levels per age category, based on the guidelines
provided by Association for Savings and Investment South Africa (ASISA). There is no guarantee
that your chosen level of income will be sustainable and therefore your withdrawal level must be
reviewed annually. If you exceed these guidelines, there is a high risk that your capital and income
will not last for the duration of your retirement.
The ILLA also offers the option to transfer the funds to a conventional compulsory life annuity at
any stage.
The underlying investment funds may also be changed to suit the investor's needs.

Guidelines for investing in ILLAs

ILLA’s are suitable for people who are retiring and who are prepared to carry the investment risk of
their retirement capital as well as the risk of outliving their capital, themselves.
Advantages of ILLAS
• Choice: With a traditional annuity, you have absolutely no say in how your money is invested;
all you are interested in is getting what the life assurer has agreed to pay you every month.
With a living annuity, you get to select the underlying investments and are provided with a
range of choices, not only between investment products but also between companies. Most of
the choices involve unit trust funds, but you may also be offered wrap funds, which normally
come with three choices: high risk, medium risk and low risk.
• Flexibility: You are able to switch between investments. The problem here is that many people
are tempted to chase the latest best-performing unit trust fund, a strategy that has long proved
to be dangerous. However, it is an advantage of living annuities that they give you the
opportunity to follow deliberate investment strategies, to take advantage of changes in
markets, and to move out of investments that are performing poorly. You are charged a fee of
0.25 percent of the investment amount to switch between investments.
• Capital protection: The residue of your capital can be left to your beneficiaries when you die.
The residue can be paid out over five years in the form of an accelerated annuity, or
commuted to a lump sum, or your beneficiaries can continue to receive an ongoing annuity. A
big advantage of living annuities is that the capital is not included in your estate for estate
duties or executor's fees. The investor does not have to pay for life cover or other guarantees.
• Health: If you are in poor health and expect to die soon after retirement, a living annuity is your
best bet, because your capital does not die with you as it would with a traditional annuity.
• Flexibility for nominees: A nominee may take a combination of an annuity and a lump sum on
the death of the former member.

Disadvantages of ILLAs
• It provides no guarantees. The annuitant will be exposed to investment and longevity risks.
These include:
o the risk that the value of investments may drop and/or the return on investments may
be lower than expected;
o the risk that the annuitant may live longer than expected.
• If the chosen level of income is too high, the annuitant may deplete the capital over time.
• Market fluctuations impact on the future income.
• If the total retirement capital is less than R1 million, the risks mentioned are magnified and
other options must be considered.
Withdrawal levels
The Association of Savings Institutes of South Africa (ASISA) recommends withdrawal levels,
based on guaranteed single life annuity rates, with a 5% escalation rate and no guaranteed term.
Sanlam gives the following guidelines for the maximum level of income for a client’s age.
These guidelines are based on a portfolio that generates a real return of 2% per annum after fees
are taken into account. Where a lower real return is generated, a lower income level should be
considered. These rates are general guidelines and should be considered taking into account each
policyholder's financial situation and all other sources of income.
There is no guarantee that the client’s chosen level of income will be sustainable and therefore the
withdrawal level must be reviewed annually. If these guidelines are exceeded there is a high risk
that the capital and income will not last for the duration of the client’s retirement.
If an annuitant insists on withdrawing a higher level of income, the annuitant must be informed of the
risks and is required to sign on the Advice Record that the risks were clearly explained.
Lifestyle and income requirements should be reviewed on an annual basis so that realistic
withdrawal levels can be maintained.

Sanlam Recommended Maximum Withdrawal Levels
AGE 55 60 65 70 75 80 85
MALE 4.0% 4.4% 4.9% 5.6% 6.3% 7.3% 8.7%
FEMALE 3.5% 3.8% 4.2% 4.7% 5.2% 5.8% 7.0%
ASISA SUSTAINABILITY TABLE

ASISA has provided a table that serves as a guide to the sustainability of a specific level of
income, for a given level of investment return in the portfolio after fees are deducted.
The table below shows how many years it will take before the investor’s income starts to reduce
given a specific investment return in a portfolio, and a selected annual income rate. The table
assumes that the investor’s income will be adjusted annually to allow for inflation.
ASISA table: Number of years before your income starts to reduce (in today’s money, i.e.
after taking into account inflation o 6% per annum).
Investment return p.a. (before inflation and after fees)
2.5% 5% 7.5% 10% 12.5%
2.5% 21 30 50+ 50+ 50+
selected at inception
Annual income rate
5% 11 14 19 33 50+
7.5% 6 8 10 13 22
10% 4 5 6 7 9
12.5% 2 3 3 4 5
15% 1 1 2 2 2
17.5% 1 1 1 1 1
Asset Allocation
Regulation 28
Regulation 28 of the Pension Funds Act prescribes the maximum limits on the different types of
investments that a pension fund can invest in. It is also referred to as Prudential Investment
Guidelines (PIGS). These limitations are applicable to Retirement Annuities funds, Pension and
Provident funds and Preservation funds, as well as individualised policies within any of these funds.
Although Reg 28 is not compulsory for ILLA’s, it is recommended.

Although ILLA’s are not subject to the Pension Funds Act, and therefore not subject to Regulation
28 limits, Sanlam advisors are advised to remain within the Regulation 28 limits doing an ILLA
investment, in order to limit the risk associated with market volatility within a client’s retirement
portfolio.
• No more than 75% may be invested in equities

• No more than 25% may be invested in property
• No more than 25% may be invested offshore (20% for ILLA’s)
• No more than 10% in total to hedge funds
• No more than 2.5% in other assets

Life & Term Annuities 69
Chapter 7
Life & Term Annuities
LIFE & TERM ANNUITIES
Compulsory annuities are purchased with the “compulsory” portion of pension funds and retirement
annuities. The instalment of a life annuity is guaranteed for life and no capital is paid back at the
death of the annuitant. (Unless an option for capital preservation is selected at inception). Choices
made at inception of the annuity are irreversible.
There is a choice between conventional annuities, and investment linked living annuities (ILLA’s).
Living annuities are not for everyone and have been massively miss-sold in South Africa in recent
years. A living annuity provides you with far more investment choice and flexibility than a
traditional guaranteed annuity, but also places the risk squarely on your shoulders to ensure that
you have sufficient money on which to live until the day you die.
Optional purchases
The “capital element” of a voluntarily purchased term annuity (or voluntarily purchased life annuity)
is exempt from tax in the hands of the recipient, provided that:
• The life or term annuity is payable to the proposer of the life annuity or to his spouse;
• The proposer is a natural person (i.e. not an institution e.g. a trust).
The exemption therefore will not apply in the following cases:

• Where a trust is the policyholder and a child is the annuitant
• Where a trust is the policyholder and the annuitant (annuity is taxed at trust tax rates)
• If the annuity is ceded outright.
NB: The exemption does apply where a trust is the policyholder and annuitant if the trust was
created solely for the benefit of a person where the court has declared the person to be of unsound
mind and incapable of managing his own affairs.

The income element (i.e. the difference between the annuity instalment and the capital element) is
taxable as income. The interest exemption does not apply to this income.
If a spouse is married In Community of Property, the income element is taxed in the hands of the
receiving spouse and not split equally between the spouses.
Calculation of taxable element of optional annuity

Client buys a R50 000 voluntary annuity for a 10-year term and receives R805 p.m. instalment.
Calculate the capital element of the instalment.
Purchase sum of voluntary term or life annuity

Capital element =
Number of installments
R50000
Capital element =
10x12
= R 416 67 p.m.
If a voluntary annuity is commuted, the capital element can be deducted as an exemption when
calculating income tax liability.
The same client wants to commute the voluntary annuity for a lump sum after 2 years. The
insurance company where the annuity was purchased offers a commutation value of R42 000.
Calculate the capital portion of the commutation value.
Capital portion = Original purchase amount – Capital portion already paid
= R50 000 – (R416 67 p.m. x 12 months’ x 2 years)
= R50 000 – R10 000 (ignore cents)
= R40 000
Taxable portion = Commutation value – Capital portion
= R42 000 – R40 000 = R2 000 taxable portion.

Terminology
English Afrikaans Description

Retirement Uittree-Annuïteit Investment vehicle for saving towards retirement
Annuity
Annuity / Life Lyfrente Guaranteed lifelong income (conventional
Annuity pension) bought at retirement
Living Annuity Lewende Annuïteit / Annuity bought at retirement (non-conventional)
Gekoppelde Lyfrente with no guarantees. This term is often used when
referring to an “ILLA”.
ILLA = Investment Beleggings- Annuity bought at retirement (non-conventional)
Linked Life gekoppelde Lyfrente with no guarantees. The income is linked to the
Annuity underlying collective investment schemes
selected by the annuitant
Term Annuity Jaargeld Guaranteed income for a fixed term
Guidelines for investing in life and term annuities

Life and Term annuities are meant for the client who wants to invest capital to receive a regular
guaranteed income. A life annuity is linked to a person’s life whereas a term annuity is linked to a
fixed term.
Irreversible
Once an application for a compulsory annuity is accepted, the decision is final and cannot be
reversed. There is no cooling off period and the client is locked in for life. Living annuities (ILLA’s)
are the only exception to this rule.

Source of capital
The source of the capital determines the rates and the type of product that may be bought. The
compulsory portion of retirement fund proceeds must be used to fund a compulsory purchase.
Rates for compulsory products are slightly better than for voluntary purchases.
 Optional purchases:
The client uses his own funds for this purpose (can include the 1/3 non-compulsory portion of an
RA or pension fund).
 Compulsory purchases:
Law requires that at least two-thirds of the proceeds of a retirement annuity fund or pension fund
must be used by the member to purchase an income for life. (if the planned annuitisation for
provident and provident preservation funds is implemented as planned on 1 March 2019, they will
become subject to the same rule).
Factors influencing life annuity rates
As annuities are paid out over the life expectancy of the annuitant, the insurer uses factors such as
age and gender to determine an appropriate rate. Health and smoking habits do not play a role.
The insurer uses the capital to invest in typical capital market instruments in order to fund a
guaranteed income. Therefore, the annuity rates are based on the current long-term capital market
rates such as the R186. If an annuity is bought when bond rates are high, the high annuity rate is
locked in for life. The rates also depend on the insurer’s long-term view of the capital market.
The following graph shows the changes of the interest rates offered by long-term government
bonds using the R186 as an example.

Guarantees
The annuity rate is reduced with every guarantee that the client adds to his annuity:
 A second annuitant (joint life)
 A term certain for the income (the longer the term, the lower the rate)
 Capital protection (at death)
 Guaranteed escalation of the income (the higher the escalation rate the lower the initial
income)
Inflation risk
Inflation erodes the buying power of a level pension over time. If the inflation rate is 8%, the buying
power of a level annuity decreases by 50% after 9 years. To combat inflation risk a client can
purchase an escalating annuity that grows at either a specified percentage or at the CPI rate. The
Sanlam Guaranteed CPI Annuity guarantees that the annuity will be adjusted annually at 100% of
the CPI.
250
200
150
L…
100
50
0
Age 65Age 70Age 75Age 80Age 85
If an escalating annuity is chosen, the initial monthly instalment is smaller than a level annuity. It
will take between 7 and 8 years for the escalating annuity to break even with the level annuity,
therefore the life expectancy of the annuitant must be taken into account when choosing an
escalating pension.

Level annuity rates at different inception ages (as at November 2009)
Age at inception Single life annuity, nil term certain, level payment (Plan 2)
55 R 84.07
60 R 88.50
65 R 95.91
70 R 106.78
75 R123.77
80 R152.18
The insurer can pay a better annuity rate to an 80-year old client, because his life expectancy is
shorter. The capital that is used to buy the instalments can be divided into bigger chunks.
In some cases, transfer of a client’s money from an ILLA to a conventional annuity can be
considered, provided that:
• the annuity rates are high
• a guaranteed high income is required
• the annuitant no longer has an appetite for capital risk
• the annuitant has a long life expectancy

Life expectancy tables:

Sanlam Annuity Products

Sanlam Annuity Products
Note: As quotations for conventional annuity products are subject to rate changes, the incomes quoted in this chapter are not valid, and should be
regarded merely as an indication for comparative purposes.
Sanlam Annuity Products: Compulsory annuities (as at April 2014)

Products Description Income Capital Longevity risk Investment Inflation risk Income per R1m
guarantee guarantee or risk at age 65, male,
repayments nil year
guarantee
Level /
Compulsory
Plan 2 Single Life Guaranteed for None, capital is Sanlam carries Sanlam carries Yes, but can be R9 286.99 level
Single Life Annuity life. May add used to the risk the risk mitigated by income
Annuity term certain. purchase choosing an
income escalating
income at
inception
R6 227.81 @ 5%
increase p.a.

repayments nil year
guarantee
Level /
Compulsory
Plan 3 Joint Life Guaranteed None, capital is Sanlam carries Sanlam carries Yes, but can be Spouse female
Joint Life Annuity until death of used to the risk the risk mitigated by age 60, 0%
Annuity surviving purchase choosing an reduction at 1 st
spouse. May income escalating
add term income at
certain inception
R7 570.34 level
income,
R34 531.41 @
5% increase p.a.

repayments nil year
guarantee
Level /
Compulsory
Plan 27 Single life Guaranteed for Capital repaid Sanlam carries Sanlam carries Yes, but can be R6 076.19 level
Capital annuity life at death as tax the risk the risk mitigated by income
Protection Plan combined with free lump sum choosing an
Whole Life a life policy escalating
income at
inception
R3 805.41 @ 5%
increase p.a.
Plan 29 Single or joint Escalating Full initial cover Sanlam carries Sanlam carries Income grows Single R3 658.79
Inflation linked life annuity Income amount payable the risk the risk with inflation. @ CPI
Income with combined with guaranteed for at death Capital does
Capital life cover. Life life, Income not grow
Retention policy premium escalates @
escalates @ CPI rate
7% p.a. annually
Joint R3 018.78
@ CPI

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ABC of Retirement Planning

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The ABC of Retirement Planning

The ABC of Retirement Planning

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