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.
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.