Over a number of years, practices have evolved in the retirement fund industry, that are inconsistent with the Income Tax Act.  One example is that pension funds replaced dependants pensions upon the death of a member in service with lump sum benefits. Another example is that some provident fund rules provide for a member opting to receive a pension upon retirement instead of a lump sum.

The different types of tax approved retirement fund (i.e. pension-, provident-, preservation- and retirement annuity fund) are a creation of the Income Tax Act. The Pension Funds Act does not recognise these differences. Whether or not a provident fund can offer pensions or annuities or whether or not a pension fund can offer lump sums would have to be determined by reference to the Income Tax Act. Referring to the definitions of pension fund and provident fund in the Income Tax Act, one will note that these definitions are mutually exclusive. A provident fund is thus a fund other than a pension fund and vise-versa.

With the practice note 5 of 2003 debacle, it should have become clear to everyone that Inland Revenue insists that the definition of pension fund does not allow for the payment of more than 49% of a benefit due to dependants in the form of a lump sum, but has to rather provide annuities. The definition of provident fund in contrast has no provision for paying annuities. By implication a provident fund cannot provide annuities else it would become tax approved as a pension fund.

Although it is possible to run two different types of fund in a single legal entity, each type of fund would have to have its own structure and receive separate tax approval. The rules of the fund should thus create a pension fund section and a provident fund section if a fund wishes to offer its members a choice between annuity and lumps sum benefits.

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.