New Sars conditions on buying an annuity at retirement

The SA Revenue Service (Sars) has issued Binding General Ruling 58, which sets out the approvals by the Sars Commissioner when purchasing an annuity at retirement. This follows the withdrawal of General Notice 18.

BGR 58 provides that an annuity must be compulsory, non-commutable, payable for and based on the lifetime of the retiring member or the value of the member’s benefit, if applicable. It may not be transferred, assigned, reduced, hypothecated or attached by creditors. Any combination of annuity methods is permitted.

Jenny Gordon, head: technical advice at Alexander Forbes Investments, Product and Enablement, says BGR 58 essentially deals with three main issues regarding annuities at retirement:

• The permitted methods of purchasing an annuity;
• The non-commutability of annuities and their payment for the lifetime of the member; and
• Creditor protection.

1. Permitted methods of purchasing an annuity

GN 18 and 18A, which were withdrawn in February 2021, stated an annuity must be bought from an approved retirement fund:

• In the name of the retiring member; or
• In the name of the retirement fund; or
• Paid directly by such retirement fund.

BGR 58 confirms that since the withdrawal of GN 18 any combination of the aforementioned methods may be provided, and a fund’s rules can provide for multiple annuities of each type, Gordon says. There is no longer a restriction on using multiple annuity methods to purchase retirement income.

Regulation 39 of the Pension Funds Act (PFA) requires trustees to have an annuity strategy for members. The definitions of each type of retirement fund state that up to one-third of the member’s total retirement interest may be commuted for a single payment, and the remainder must be paid in the form of an annuity (including a living annuity).

However, the provisions of the Act do not prescribe whether the annuity must be provided by the retirement fund or purchased from an insurer, nor do they prescribe the nature or characteristics of such an annuity, Gordon says.

In addition to BGR 58, the Taxation Laws Amendment Bill of 2021 proposes to include this right in the Income Tax Act (ITA).

A proposed proviso in the ITA (that is not in BGR 58) will limit the capital value of each annuity purchased to not less than R165 000. This is to avoid a multiplicity of small annuities in an attempt to get around the annuity requirements – the small annuities could be commuted for a lump sum, Gordon says.

The implementation date is expected to be 1 March 2022.

2. Non-commutable, payable for and based on the lifetime of the retiring member

BGR 58 states that an annuity must be compulsory, non-commutable, payable for and based on the lifetime of the retiring member “or the value of the member’s retirement interest”, if applicable.

A living annuity is commutable when the capital assets of the living annuity is R125 000 or less.

Gordon notes that BGR 58 includes the wording “… or the value of member’s retirement interest, if applicable”.

A “member’s interest” is the value of the retirement benefit from the fund and is not the capital of each living annuity.

“Although the terminology used should have been different, it seems that the intention is to recognise that if the capital of a living annuity is sufficiently small to cause the capital to fall below the de minimis amount of R125 000, then the annuity is commutable and won’t be payable for the lifetime of the annuitant.”

No legislation provides for a guaranteed annuity to be commutable. GN 16, which provided for it under certain conditions, has been withdrawn. Therefore, a guaranteed annuity is no longer commutable during the lifetime of the member, Gordon says.

3. Creditor protection

BGR 58 acknowledges that an annuity may not be transferred, assigned, reduced, hypothecated or attached by creditors as contemplated by sections 37A and 37B of the PFA.

Section 37A states that “save to the extent permitted by this Act, the Income Tax Act or the Maintenance Act, no benefit provided for in the rules of a registered fund (including an annuity purchased or to be purchased by the said fund from an insurer)” …will be subject to the creditor protection provisions of the section.

The Commissioner interprets section 37A as applying to all the annuities that can be purchased at retirement, Gordon says.

BGR 58 applies from 26 February 2021 until it is withdrawn or amended, or the relevant legislation is amended.