by Marthinuz Fabianus - Deputy Managing Director

When considering a retirement savings vehicle for employees, an employer can opt for a pension fund or a provident fund. Except for income tax differences between the two which I will deal with further on, the main difference between the two is that members of pension funds are able to only take out a portion of their retirement benefits (currently one-third) in a lump sum upon retirement. The remaining amount (two-thirds) is to be paid as a pension in monthly pay-outs. Members of provident funds can take out as much or all of their benefits as they would like in a lump sum at retirement. Provident funds gained popularity in South Africa in the 70’s with the establishment of homelands and a surge in foreign migrant workers employed in the South African mining and steel industries.  Given our colonial history, Namibia obviously inherited the pension and provident fund concepts in the Income Tax Act.    

My contention is that provident funds have always been less advantageous from an Income Tax point of view compared to pension funds. At retirement, one-third of the lump sum payable from a provident fund is tax free. The balance two-thirds is fully taxable in the hands of the retiring member per his marginal rate of tax. A member of a pension fund on the other hand, may also commute a maximum of one-third tax free in a lump sum. Income Tax is payable on the monthly income (pension) payable from the balance two-thirds. This implies that no tax is currently payable on the first N$50 000 per annum and only the income above this is taxable per retiree’s marginal rate of tax. Moreover, in the event of death of a provident fund member, two thirds of the benefit payable is taxed in the name of the deceased, at the deceased’s marginal rate of tax. Under a pension fund on the other hand, up to 66% of the benefit payable upon the death of a member may be commuted in a lump sum free of tax. The balance 34% is to be paid as income from where Income Tax would become payable in the name of the beneficiary, but again only the income above N$ 50 000 per annum will attract Income Tax at the marginal rate of tax.  

My second point of contention is that very few people (and this holds true for even the most educated) have the ability and discipline to manage retirement capital prudently for their survival during their retirement years. It is to be noted that after the average retirement age of 60 years, a person can still expect to live another 20-30 years. The retirement capital should thus be managed in such a manner that it outlives the pensioner and  still leave something behind for his or her spouse to survive on and/or any other substantive dependents the retiree may still have. To make matters worse, our Receiver of Revenue has recently come to the correct realisation that the entire retirement benefit paid from a provident fund forms part of the gross income and a tax directive is a requirement in all cases even if the member of the provident fund decided to use the two thirds to provide a monthly pension. The relevance of the tax directive requirement is that Inland Revenue can intercept the benefit in case of a delinquent taxpayer. The relevance is also that once a benefit is gross income, a transfer to an insurance product for the purchase of an annuity is a voluntary transaction. This transaction does not enjoy the exemption that is offered if the capital were to be transferred to another approved fund and is fully taxable before transfer to the insurance product.  

We all know that the state old age grant is minimal and cannot be regarded as adequate except for a very low standard of living. This makes the provision of a secured income during retirement age the ever more essential. As an aside, South Africa is currently in the process of doing away with provident funds in that country.

This to my mind makes the future of provident funds in Namibia doubtful.

Marthinuz Fabianus is Deputy Managing Director at Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a Macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years industry experience.