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Pension Funds
Tuesday, February 1, 2005
Practice Note

Employees should take the issue of pension and provident fund benefits much more seriously. Stanlib believes they will if they realise the tax implications of failing to claim benefits.
In General Note 35, SARS has confirmed the requirements relating to the treatment by pension and provident fund trustees or administrators of unclaimed benefits that arise from termination of employment. Such benefits are classed as ‘unclaimed’ if the beneficiary fails to claim ‘within a reasonable period after the benefit has accrued.’ It is understood this ‘reasonable period’ is up to six months from the date of accrual.
Stanlib says it is the responsibility of the fund and administrators to apply for a tax directive and deduct employees’ tax on such an unclaimed benefits. To preserve tax benefits members who terminate employment should consider the following options:
• Elect a deferred pension in the existing employer fund;
• Transfer the benefits to their new employer’s retirement fund;
• Transfer the benefit into a preservation fund; or,
• Transfer the benefit into a single-premium retirement annuity fund (RA).

Stanlib’s Mike Galloway urges individuals to ensure they elect the most appropriate option and set the process in motion prior to the last day of employment. Failure to do so will create an unclaimed benefit, which could result in an unfavourable tax consequence for investors.
Those who are not well versed in pension and provident fund benefits should seek a licensed and reputable advisor to assist in making the right decision. “But it shouldn’t end there. Most people do not save enough. So in addition to preserving the existing benefits we need to consider additional top ups of the pension or provident fund package, or adding additional savings through a separate retirement annuity.”
The RA is a tax-efficient, long-term savings mechanism that has traditionally been used by professionals and small business people instead of the group schemes available to Big Business.
By putting regular monthly sums into an RA or investing a lump sum in a single-premium RA it is possible to build a useful nest egg while making use of tax incentives that encourage prudent provision for retirement. The annual tax-deductible amount on an RA is the actual contribution limited to a maximum of the greatest of:
• 15% of non-retirement funding income less certain deductions;
• R3500 less deductible pension fund contributions of the employee; or,
• R1750

Non-retirement funding income can be defined as remuneration not taken into account when determining the contributions the employer makes on behalf of the employee to a pension or provident fund. This includes, for example, bonuses, commission and other business income. A financial advisor should be able to assist in determining the tax-efficient contribution value. “Again, be vigilant in evaluating the costs associated with these investments,” he advises.
It is true the RA has never shaken off its traditional image as the pension plan for the self-employed. And few company employees take one out as a supplementary means of saving, but there is every reason why they can and should.
He urges employers to get this message across and assist members to keep abreast of tax issues and options available to them.

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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