Pension fund rules generally allow, and sometimes even require the retiring member to purchase a pension with the amount of the capital that cannot be commuted for cash (i.e. two-thirds). Mostly the member has the choice to have the one-third that may be commuted for cash, paid out to him/her soonest after retirement and the expectation is that this happens within a few days.

Problem number one is that often the rules of the transferring fund and the rules of the receiving fund do not ‘dovetail’. Receiving funds often do not accept retirement capital unless it represents the full amount before commutation of the one-third. So if the transferring fund has already paid out the one-third the two-thirds cannot be transferred.

Problem number two is that a practice has evolved of brokers selling an insurance product to the retiring member. The Income Tax Act dictates that benefits can only be transferred tax free, if such transfer is made to another ‘approved fund’. Typically these insurance products do not fall into the category of ‘approved fund’ and the administrator of the transferring fund is obliged to determine and deduct tax on the amount transferred to the insurance product. Since annuities then paid by such insurance products are taxed again, the member is effectively taxed twice on the income generated by his/her retirement capital.

Trustees and their consultants should review the fund rules to make these ‘dovetail’ with the receiving funds typically offered in the market and should caution fund members against transfers to insurance products.

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.