Helmke Sartorius von Bach | Jul 1, 2020 | 0
Annuity “for life” only
The Commissioner of Inland Revenue many years ago issued Practice Note 1 of 1998 in response to the advent of new investment linked annuities, or also referred to as living annuities. In short this practice note prescribes that not more than 20% and not less than 5% of the capital at the start of every year may be paid in the form of an annuity. It also prescribes that in the event of death of the annuitant, no further amount may be commuted for a cash lump sum and that the balance must be paid in the form of an annuity over no less than 5 years. It goes without saying that this annuity is taxable.
Defined contribution pension funds of course also place the emphasis on the retirement capital retaining its identity as the property of the fund member. Where such fund provides for members converting the capital to an annuity within the fund, rules typically attempt to retain the ‘ownership’ notion by availing the remaining balance upon death to the deceased pensioner’s successor/s. Where this occurs, the principles laid down in practice note 1 f 1998 also apply.
But what about retirement annuity funds offered by insurance companies? There appears to be some difference of opinion in the market whether or not the retirement annuity fund can also affect an accelerated annuity of the remaining balance upon death over 5 years.
We are of the opinion that once retirement capital has been transferred to a Retirement Annuity Fund, it must under all circumstances be paid in the form of a ‘life annuity’ and cannot be accelerated independent of where the capital derived from. This opinion derives from the definition of ‘retirement annuity fund’ in the Income Tax Act that categorically states that the fund may only pay an annuity for life of a beneficiary. Clearly accelerating the payment would not meet the ‘for life’ requirement.