Why do pension fund rules allow additional voluntaru contributions

Fund rules often provide for members making additional voluntary contributions (AVC’s), “…subject to such conditions imposed by the TRUSTEES from time to time.”

Despite the fact that the rules allow members to make AVC’s, such contributions are not tax deductible, and the fact that rules still make provision for such contributions is an anachronism rooted in the old South African tax regime that ended in Namibia in 1981.

Members who make such contributions then attempt to claim these in their annual tax return. Inland Revenue would require proof from the fund that the member has made contributions to the fund and members then approach the fund or administor to issue a letter confirming the AVC’s he/she has made. Member contributions to a retirement fund, however, are only tax deductible to the extent that they were accounted for on the member’s pay record and are reflected on the annual PAYE 5 form. Only voluntary contributions to a retirement annuity fund are tax deductible by an individual, subject to certain conditions.

We do not issue such letters as a matter of principle, as such letter may be used to attempt to claim these contributions for tax purposes. Since AVC’s are not tax deductible, any attempt to claim these for tax purposes is tantamount to tax evasion. It exposes all parties involved to risk. These risks include the risk of tax penalties and interest, reputational risk, the risk of the fund losing its tax status as approved fund and the risk of money laundering.

Where a fund nevertheless offers its members to make additional non-tax deductible contributions, we suggest that the fund considers imposing the following conditions:

1. Members who wish to make additional voluntary contributions must apply in writing to the trustees in respect of every contribution to be made, and in respect of a fixed monthly contribution, reflecting the once-off amount to be paid, or the monthly payment to be made and the period for which such payment will be made.

2. Members making additional voluntary contributions are to disclose the source of funds for making such contributions and submit documentary evidence to the satisfaction of the fund.

3. The fund informs members wishing to make AVC’s explicitly, that AVC’s are not tax deductible and that they should not be claimed for income tax purposes as this amounts to tax evasion that may have severe consequences for the tax payer.

4. The fund informs the member that any fees that may be levied by the administrator of the fund from time to time in respect of any additional voluntary contributions, shall be deducted from the contribution/s received and only the balance shall be allocated to the member in the records of the fund.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.