ISR3702

TOPIC 2: LIFE INSURANCE PRODUCTS

Lesson Unit 4: Retirement Annuities, Annuities and Supplementary

Benefits

Contents
4.1 Introduction to retirement annuities
4.2 Retirement annuity funds
4.3 Annuities

Learning outcomes

When you have completed studying this lesson unit, you should be able to

• list the rules that a retirement annuity needs to abide by, to be approved by the
Commissioner for Inland Revenue
• explain how to establish the maximum tax deduction allowed by an individual for
contributions to a retirement annuity
• discuss the differences between a voluntary and a compulsory purchase annuity
• list and explain the different types of immediate annuities that are available

Key concepts
Annuities certain
Compulsory annuities
Guaranteed annuities
Immediate single annuities
Retirement annuities
Voluntary annuities

Introduction
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Open Rubric
This lesson unit proceeds with a discussion of the products offered by life insurance
companies (continuing from Lesson Unit 3). Lesson Unit 4 deals with retirement annuity
funds and annuities. Remember that certain annuity products, such as compulsory
annuities, are linked to retirement benefits (discussed in the previous lesson unit).

Also remember that this lesson unit will not repeat the content of prescribed the book, but
provides activities and, where necessary, an explanation of the subject covered. The
activities are designed to help you apply the principles or rules.

Overview
The discussion of annuity products is accompanied by a discussion of the underlying
legislative framework. Lesson Unit 4 consists of the following three subjects (excluding the
revision and written questions):introduction to retirement annuities, retirement annuity funds
and annuities.

4.1 Introduction to retirement annuities

Learn about, and understand, the content of section 4.1 in the prescribed book.

4.2 Retirement annuity funds

Activity 4.1

Distinguish between a retirement annuity fund and a provident fund.

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Feedback on activity 4.1

Retirement annuity Provident fund

The employer has no role
It is mostly purchased by individuals
It has punitive restrictions on withdrawals
before retirement age
Where the amount available exceeds the
statutory threshold, only one third can be
withdrawn as a lump sum
Add your own information here
The employer must pay contributions
It is purchased by organisations
Withdrawal restrictions started 1 March
2021
Withdrawal restrictions started 1 March
2021
Add your own information here

Study the following sections in the book:

4.2.1 Definition and rules

Read this section in the prescribed book.

Additional information
Haupt (2017:416) states the following about retirement annuity funds:

• A retirement annuity fund is like a pension fund and a pension preservation fund, except
that a person who has a retirement annuity policy does not have to be an employee.
• All retirement funds, including retirement annuity funds, must be approved by the
Commissioner of the South Africa Revenue Services (SARS).

Haupt (2017:70) adds the following about annuities:

• Annuities from pension and retirement annuity funds are taxed as normal income.
• Provident funds do not pay annuities, the full investment value is paid as a lump sum.
• Only one-third of the investment value is paid as a lump sum, except where two-thirds
is below the set threshold.

4.2.2 Deduction of contributions

Additional information

You are entitled to a deduction, under section 11F, of contributions to any pension,
provident or retirement annuity fund. The contributions that may be claimed as a
deduction in the current year of assessment are limited to the lesser of:

(i) R350 000

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(ii) 27.5% of the higher of –
• remuneration, or
• taxable income, or
(iii) taxable income of that person before –
• including any taxable capital gain.

The remuneration referred to, is for employees’ tax purposes, but excluding retirement
lump sums and severance benefits. The taxable income referred to excludes retirement
lump sums and severance benefits, and is the taxable income before the deduction of
qualifying retirement fund contributions, qualifying foreign tax credits [section 6 quat(1C)]
and bona fide donations (section 18A).

Contributions made in prior years that were not allowed as a deduction in those years will
be carried forward to the current year of assessment, unless they were deducted from a
retirement fund lump sum or withdrawal benefit, or set off against a compulsory annuity.
Arrear contributions are simply added to the current year’s contributions and treated in
the same manner.

The limits apply to the sum of all contributions made to pension, provident and retirement
annuity funds. The deduction may be set off against non-trade income such as interest.

4.3 Annuities

Learn about, and understand, the content of section 4.3 in the prescribed book, including
the following annuity products:
• Fixed annuities
• Variable annuities
• Indexed annuities

Additional information
Haupt (2017) states that the Income Tax Act does not define annuity, but relies on case
law, where an annuity was defined:
• It provides for a fixed annual (periodical) payment, even if it is divided into
instalments.
• Payment is repetitive.
• It is chargeable (there is an obligation to pay) against some person.
• The beneficiary has a right to receive more than one such payment.

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Activity 4.2

Discuss the advantages of annuity investments.

Feedback on activity 4.2

• They provide periodic income payouts for a definite period or, in some cases, the
lifetime of the person.
• Such investments also offer a sort of insurance cover to the individual concerned.
• They help the investor save money over the long term.
• They could be used for taking care of the costs involved in a dependant’s education
– with the rising costs of a good education, saving for educational expenses is critical.

Study the following section in the book:

4.3.1 Difference between a voluntary and compulsory purchase annuity

Learn about, and understand, the content of section 4.3.1 in the prescribed book, including
the following:

Additional information (National Treasury 2019)

Annuitisation rules
In terms of the annuitisation rules, members of retirement vehicles, irrespective of whether
the vehicle in question is a pension fund, provident fund or retirement annuity, will be subject
to similar rules regarding access to cash on retirement.

With specific exceptions provided in the ‘grandfathering’ provisions, from 1 March 2021,
members of all retirement funds will only be able to take one-third of the total value of their
retirement fund interest by way of a lump sum, with the balance being taken as an annuity.

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This is further subject to an exception where the total retirement interest does not (currently)
exceed ZAR 247 500.00, in which case the full amount may be taken in cash.

The grandfathering provisions (‘vested right protection’) exist to ensure that the restriction
only applies to amounts contributed to funds on or after 1 March 2021, and not to members
who are close to retirement.

Thus, the rules will not apply to

the credit in the fund as at 1 March 2021 and subsequent fund return on that amount;
or members of provident funds and provident preservation funds aged 55 years and
older on 1 March 2021 who will be entitled to take their full benefits on retirement
(including the fund return) as well as any contributions made to the provident fund
after 1 March 2021.

4.3.2 Annuities certain

4.3.3 Immediate single-life annuities
4.3.4 Guaranteed annuities
4.3.5 Example of plans involving annuities

Conclusion

Based on what you have learnt thus far, reflect on what you consider to be the most
important information for understanding life insurance. Lesson Unit 4 discussed retirement
annuity funds and annuities. It also discussed the tax provisions which need to be
considered when weighing up these products. The next lesson unit discusses healthcare
and funding in South Africa.

Sources consulted
Haupt, P. 2017. Notes on South African income tax. Roggebaai: H&H.
National Treasury. 2019. Explanatory memorandum on the draft taxation laws.
https://www.moonstone.co.za/upmedia/uploads/library/Moonstone%20Library/MS%2
0Acts%20Legislation/Draft%20Taxation%20Laws%20Amendment%20Bill.pdf
Republic of South Africa. 1962. Income Tax Act 58 of 1962. Pretoria: Government Printers.
Republic of South Africa. 1996. Tax on Retirement Funds Act 38 of 1996. Pretoria:
Government Printers.

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South African Revenue Services. 2017. Budget 2017 tax guide.
http://www.sars.gov.za/AllDocs/Documents/Budget/Budget%202018/Budget%20Tax
%20Guide%20A4.pdf (accessed on 3 July 2017).