An article that appeared in ‘Pensions World’ magazine of September 2010, deals with payment of a lump sum death benefit by a fund to a testamentary trust. Where member directs payment of death lump sum to his/her testamentary trust, the trust deed must provide for the following:
- It must make provision to receive money from a retirement fund.
- It must provide for fund benefits to be dealt with by the trustees of the trust, in the manner directed by the fund.
- Capital must be ring-fenced, capital and income must vest in the designated beneficiary and may not be redistributed.
Disposition of capital of deceased beneficiary in beneficiary trust
When disposing of the death benefit of a deceased fund member, trustees commonly direct that the capital allocated to minor beneficiaries be paid into a trust for the benefit of the minor beneficiary until the beneficiary reaches majority. Section 37C of the Pension Funds Act defines the trustees’ obligation with regard to the disposition of a death benefit. It is clear from this section that the trustees are obliged to apply their discretion in allocating capital to a beneficiary[ies] who has[ve] to be [a] natural person[s].
However under certain circumstances, a benefit can be paid to a trust. As explained in the preceding article ‘Can you request that your death benefit be paid into your testamentary trust?’ the trust deed must comply with 3 key conditions as set out. One of these conditions is that the capital must be ring-fenced and that capital and income must vest in the beneficiary and may not be redistributed. It follows that in the event of the death of the minor beneficiary prior to the ‘expiry date’ of his/her trust, any remaining capital, including interest must be paid to the deceased beneficiary’s estate.
If a retirement fund’s dependants trust deed does not make it categorically clear that a beneficiary’s benefit from the fund vests in the beneficiary for his or her sole and exclusive benefit, the trustees of the fund are well advised to ascertain that the trust deed is amended accordingly.
If you do contemplate shifting assets, consider engaging specialist ‘transition management’. What is ‘transition management’ you may ask? Well it is a specialist service offered to funds that want to transfers asset from a manager/s to an/other manager/s.
Whenever your fund contemplates a significant restructuring of its investments, our best advice is to consider employing a transition manager. The minimum transaction such specialists would typically consider is a transfer of N$ 50 million plus. Their fees for such a service typically comes out of them earning brokerage on any buy and sell deals that will need to be made in the process. Effectively it would not cost the your fund anything extra. The process provides full transparency to you and the means to measure the efficiency of its execution.
Insurance companies are offering members of pension funds to move their retirement capital from their retirement fund into an ‘untied’ annuity – i.e. an annuity offered by an insurance company to the applicant who will be the owner of the insurance policy issued in respect of this annuity. Insurance companies are relying on a circular and an unofficial ‘memorandum’ once issued by Namfisa on this topic, both of which in our opinion are ambiguous. They have also approached Inland Revenue who issued a ruling to them in this context. All three communications that were issued make it clear that the capital must retain the protection it would enjoy under the Pension Funds Act. We believe this mechanism does not afford such protection. The consequence of our opinion is that the member who used this mechanism may be taxed at any time in future should Inland Revenue conclude that the capital that was moved to an ‘untied’ annuity should have been taxed, with interest being raised on top of it.
For the fund such outcome could at best present a significant reputational risk, potentially even a pecuniary risk. A further risk for the member is the potential demise of the insurance company that could mean the loss of the member’s entire retirement capital. Again, for the fund such outcome could at best present a significant reputational risk but potentially even a pecuniary risk.
Unfortunately we earn much scorn as the ‘odd one out’ and are at times even discredited by brokers who ‘smell’ the hidden agenda of the Benchmark Retirement Fund offering a pension arrangement to members upon retirement from another fund which is fully compliant with both the Income Tax Act and the Pension Funds Act. This mechanism is referred to a ‘tied’ annuity – i.e. an annuity offered by an approved retirement fund to its members.
We consider it our obligation to assess the potential implications of the payment of a benefit for the beneficiary and the fund from a legal point of view. Where we are of the opinion that such payment presents a risk to either the fund or the member, or both, we would not affect payment without having pointed out the possible consequences to the member and/ or the fund. As fund administrator, we cannot be expected to assume responsibility for such risk and will not allow the member to be exposed to this risk. Where the fund is prepared to assume liability for the risk we will proceed as directed by the fund.
The law unfortunately is not always clear and has to be interpreted if no reliance can be placed on a legal precedent, as is mostly the case. Interpreting laws is a matter of opinion, sometimes well qualified, but at times also unqualified. Even if such interpretation is given by the best legal expert it will only be proven right or wrong once a court has pronounced itself on such a matter. A fund struggling with this matter is well advised to distinguish between qualified and unqualified advice when confronted with different opinions.
While the uncertainty prevails on the matter of ‘tied’ versus ‘untied’ annuities, the procedure we have instituted transfers the tax risk to Inland Revenue by requesting a tax directive with a form which clearly spells out that the retirement fund member intends to move the retirement capital to such an ‘untied’ annuity. After all correspondence with Inland Revenue, Inland Revenue will find it very difficult to ever argue that RFS has not clearly communicated its opinion and the substance of such transactions.
As far the risk of the demise of the underwriting insurance company is concerned, RFS similarly has repeatedly pointed out its opinion to Namfisa and has expressed its concern to Namfisa on the two communications Namfisa issued in this context, that are being interpreted by insurance companies to justify such transactions. RFS clients have of course also been made aware via circulars and the Benchtest newsletters of the risks presented by the mechanism of providing ‘untied’ annuities with retirement capital from a retirement fund.
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