29 February 2008

 

 

Parliamentary Portfolio Committee on Finance

 

Att: Mr Andre Hermans

 

Dear Mr Hermans

 

COMMENT: DRAFT TAXATION LAWS AMENDMENT BILL, 2008

 

Thank you for the opportunity to submit comments. The LISP industry welcomes regulatory amendments that promote clarity, portability and a levelling of the playing fields within the retirement fund industry.

 

Specifically, we welcome the proposed clarity around the definition and status of living annuities, and we support the levelling of the playing field for all providers of such annuities. 

 

In August 2006, the Cape High Court held in the Higgo Case that the living annuity in question did not constitute an annuity. Although it may be arguable that the contract in question is distinguishable from other living annuity contracts, the case has resulted in widespread uncertainty as to the legal nature of living annuities and whether the tax treatment of both the underlying assets as well as the regular payments made, has been correct. Considering the fact that over R56.8 billion is currently invested in these products, it is imperative that the Income Tax Act is amended to make it unequivocally clear that living annuities are to be treated as annuities for taxation purposes. The proposed amendments achieve this very desirable result, and LISPA expresses its wholehearted support in this regard.

 

Although it would appear to be desirable to allow banks and collective investment scheme management companies* to issue living annuity contracts to pensioners and their nominees, it needs to be considered whether as a matter of policy it will be prudent to permit them to do so without a long-term insurance licence.

 

For several years, businesses that are not long-term insurers for any other purpose, have been conducting living annuity business. These include intermediary organisations and networks, collective investment scheme companies and companies within banking groups. They have acquired limited long-term insurance licences in order to issue living annuity contracts. The requirement of such licenses has not posed a barrier to the conducting of this business.

 

 

 

* The proposed definition of  “living annuity provider” envisages collective investment schemes as being living annuity providers. It is our submission that it would be more appropriate for the collective investment scheme management companies to play this role.

 

 

- 2 -

 

It may well be desirable for this status quo to continue, in that the long-term insurance regulatory environment currently guarantees consumer protection such as compulsory portability, tax-free status of the assets underlying the annuity provision, and capital adequacy regulation.

 

Although banks and collective investment scheme management companies are well regulated, their regulation is not focused on the provision of living annuities.  Where the same level of protection can be afforded by an alternative regulatory environment that is applicable to all living annuity providers, we would support the issuing of living annuity contracts by providers other than long-term insurers. However, it will be vital to first create a central regulatory regime to ensure consistent consumer protection such as compulsory portability, which is currently ensured through directives issued by the Registrar of Long-term Insurers.

 

 

 

LISPA also welcomes the removal of artificial barriers to entry for preservation funds, and the improved portability that will be afforded to members of preservation funds. 

 

 

 

While strongly supporting principles in the Bill, LISPA recommends the following drafting amendments for the sake of clarity:

 

 

 

Definition of “living annuity”

 

 

1.         The definition of “living annuity” refers to an annuity purchased “on or after retirement date”.  The definition of “retirement date” includes the date on which a benefit becomes due as a result of death. However, to avoid unnecessary cross-referencing it would be preferable to insert the words “or death” after the words “retirement date” in the fifth line of the definition i.e. “on or after retirement date or death….”

 

 

2.         Because of the nature of living annuities, it is possible that the annuitant may be a “third/fourth/fifth generation” annuitant. Such annuitants will not fall within the definition as it is currently worded, in that they will be neither former members nor dependants or nominees of former members. In order to include contracts issued to “third generation” annuitants, it is therefore recommended that the words “or any subsequent nominee” be inserted after “dependent or nominee” in the third line. The definition will then read as follows:

 

”living annuity means a right of a member or former member of a pension fund….or his or her dependant or nominee, or any subsequent nominee, to an annuity…”

 

 

3.         In paragraph (a), the phrase "for the purpose of the living annuity" in the last line should be replaced with the phrase "for the purpose of providing the annuity", which is technically more correct, since the assets are held for this purpose rather than merely for the abstract purpose of "a living annuity".

 

 

 

 

 

 

 

 

 

 

- 3 -

 

 

4.         The quantum of the regular payment that constitutes the annuity should be referred to consistently throughout. Paragraphs (b) and (d) refer to the quantum of the regular payment. For consistency, these paragraphs should therefore be amended to read as follows:

 

“(b)     the amount of the annuity is determined in accordance with a method of formula   prescribed by the Minister;”

 

“(d)     the amount of the annuity is not guaranteed by the living annuity provider; and..”

 

 

5.         We recommend that a sub-paragraph (f) be included as follows:

 

       “(f)   regulations may be published by the Minister from time to time.”

 

 

 

Definition of “living annuity provider”

 

We refer to the policy issue referred to in our introduction, and reiterate that it needs to be considered whether or not it will be desirable for living annuities to operate in an inconsistent regulatory environment under bank and collective investment scheme and long-term insurance licenses, or whether it is desirable that the providers continue to be required to maintain their limited long-term insurance licenses until an alternative, holistic regulatory environment can be created.

 

 

Definition of “normal retirement age”

 

We recommend that sub-paragraphs (a) and (c) of the definition of “normal retirement age” be amended to include references to the rules of the Fund, as follows:

 

(a)   in the case of a member  of a pension fund or provident fund, the date on which the member becomes entitled to retire from employment in terms of the rules of the fund for reasons other than sickness, accident injury or incapacity through infirmity of mind or body;

 

(c)  in the case of a member of any fund contemplated in this definition, the date on which that member becomes permanently incapable of carrying on his or her occupation in terms of the rules of the fund due to sickness, accident, injury of incapacity through infirmity of mind or body.

 

 

Definition of “pension fund”

 

We recommend that sub-paragraph (dd) of the definition of "pension fund" be amended to include as the last phrase of the sub-paragraph the following: "...or such amount as the Minister may gazette from time to time."

 

 

Definition of “pension preservation fund”

 

1.         Sub-paragraph (a)(i) of the definition of "pension preservation fund" should be amended to delete the phrase "...or another pension preservation fund...".  Employment-related events such as resignation, retrenchment and dismissal have never triggered termination of membership of a preservation fund. Members of "another pension preservation fund" are in any event dealt with in sub-paragraph (a)(ii). 

 

 

 

- 4 -

 

 

 

Sub-paragraph (a)(i) of this definition should therefore read as follows:

 

 "(a)    membership of the fund consists of-

 

(i)         former members of a pension fund whose membership of that fund has terminated due to -"

 

 

Sub paragraph (a)(ii) of the definition should read:

 

“(ii)    former members of another pension fund which was wound up or who elected … that other fund;”                    

 

 

2.         The definition of “pension interest” in the Divorce Act calculates the amount due to the former spouse by reference to a benefit that would become payable to the member spouse on resignation from employment. Because resignation never triggers a benefit in a preservation fund, no amount of pension interest can be calculated for the purpose of a divorce order. A transfer from a preservation fund as contemplated in sub-paragraph (iv) is therefore not possible until the Divorce Act is amended to remove this anomaly. The reference to preservation fund in sub-paragraph (iv) should therefore be deleted.

 

 

3.         Similarly, the reference in sub-paragraph (c) to payments contemplated in paragraph 2(b)(i) of the Second Schedule should be deleted.  It is not relevant in respect of preservation funds.

 

 

4.         Furthermore, we recommend that the sub-paragraph (c) should be amended to read as follows:

 

“(c)     Not more than one retirement fund lump sum withdrawal benefit in respect of the initial translocation benefit from a pension fund ….. is allowed during the entire period during which a person is a member of one or more pension preservation fund(s);”

 

 

5.       To enable further regulation of living annuities without the need for legislative amendment, we recommend that the last phrase of sub-paragraph (e) of the definition of "pension preservation fund" be amended to include the phrase:

 

 

"..., or such amount as the Minister may gazette from time to time."

 

 

 

Definition of “provident preservation fund”

 

The same comments as above also apply to the definition of “provident preservation fund”.

 

Please note that there appears to be a typographical error in par a(ii) of the definition of “provident preservation fund” – references to “pension preservation fund” should be replaced with “provident preservation fund”

 

 

 

 

 

 

 

 

- 5 -

 

 

 

General comments with regards to the definitions of  “pension preservation fund” and “provident preservation fund”

 

 

It is not clear from the definitions whether

 

-            translocation benefits may be paid to more than one retirement fund;

-      any amount deducted from the translocation benefit before transfer to the preservation fund will be regarded as the once off final withdrawal;

-      the transfer should be affected within a specific time frame.

 

Clarity on these issues would be appreciated.

 

 

 

Definition of “retirement annuity fund”

 

The new sub-paragraph (b)(v) effectively removes the age 70 limit for entitlement to the payment of an annuity. The removal of this restriction is welcomed.

 

 

Definition of “retirement funding employment”

 

For grammatical correctness, we recommend a small change to sub-paragraph (b) of the definition of "retirement funding employment" with the deletion of the phrase "...as respects..." and in its place the inclusion of the phrase "...with regard to..." so that the paragraph reads as follows:

 

"(b)  in relation to a partner in a partnership who was an employee of the partnership and who on becoming a partner retained membership of the pension fund of the partnership as if he or she had not ceased to be an employee, with regard to the part....”

 

 

Paragraph 2 of the Second Schedule

 

Sub-paragraph (b)(i)

 

The budget tax proposals indicated that the non-member spouse would be liable for the tax in respect of divorce settlement payments made by retirement funds.  However, contrary to these proposals, the Bill proposes that these payments will be deemed to accrue to the member as a withdrawal benefit on date of deduction of the payment and that the member has a right of recovery against the non-member. It would be welcomed if the present opportunity is utilized to give effect to the budget tax proposals and the tax liability of the non-member spouse is dealt with in this Bill.   

 

 

Paragraph 2B

 

See our comment under sub-paragraph (a)(iv) of the definition of “pension preservation fund” with regard to divorce orders.

 

 

 

 

 

 

 

 

- 6 -

 

 

 

LISPA would welcome any further engagement and discussions with National Treasury on these issues.

 

 

 

Yours sincerely

 

 

 

 

 

Rosemary Lightbody

(Chairperson: LISPA Legal & Tax Committee)