Commutation of a Living Annuity on emigration

Lize de la Harpe, Legal Adviser at Glacier by Sanlam.

We are often asked whether or not a living annuity can be commuted when the annuitant emigrates. The answer is of course no – but the reason is not well understood.

In this article we will specifically focus on section 1 of the Income Tax Act which sets out the only instances in which a living annuity may be commuted.

Section 1 of the Income Tax Act (Act 58 of 1962):

Section 1 of the Income Tax Act sets out the limited instances in which a living annuity may be commuted.

A “Living annuity” is defined in section 1 as follows:

“living annuity” means a right of a member or former member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, or his or her dependant or nominee, or any subsequent nominee, to an annuity purchased from a person or provided by that fund on or after the retirement date of that member or former member in respect of which —

(a) the value of the annuity is determined solely by reference to the value of assets which are specified in the annuity agreement and are held for purposes of providing the annuity;

(b) the amount of the annuity is determined in accordance with a method or formula prescribed by the Minister by notice in the Gazette;

(c) the full remaining value of the assets contemplated in paragraph (a) may be paid as a lump sum when the value of those assets at any time becomes less than an amount prescribed by the Minister by notice in the Gazette;

(d) the amount of the annuity is not guaranteed by that person or fund;

(e) on the death of the member or former member, the value of the assets referred to in paragraph (a) may be paid to a nominee of the member or former member as an annuity or lump sum or as an annuity and a lump sum, or, in the absence of a nominee, to the deceased’s estate as a lump sum; and

(f) further requirements regarding the annuity may be prescribed by the Minister by notice in the Gazette;

As one can see from the above, sub-par (c) of the definition of living annuity makes provision for the commutation of an annuity where the value of the annuity becomes less than an amount determined by the Minister.

Currently, Government Gazette 31544 (issued on 30 October 2008) provides that an annuitant may commute the full value of a living annuity for cash, if the remaining value of the living annuity is:

a) R50 000 or less, if any value of the annuity or any part of the retirement interest was previously commuted for a single payment; or

b) R75 000 or less, in any other case.

Clients may therefore apply to have their living annuities commuted for cash if they meet the above criteria.

What is equally important to understand is the legal nature of a living annuity:

i. At retirement, a member of a retirement fund (excluding a provident fund) is entitled to withdraw up to a maximum of one-third of the underlying fund value as a lump sum. A minimum of two–thirds of this value must be used to buy a compulsory annuity. This compulsory annuity can be provided by the retirement fund or, alternatively, the retirement fund can transfer the obligation to provide an annuity to a registered insurer. In terms of the arrangement with the insurer, the insurer undertakes to provide an annuity income to the former member.

ii. Upon the entering into the living annuity contract, the annuitant becomes entitled to an annuity income. The annuitant is not entitled to the underlying capital providing the annuity. These assets are invested and recorded in the insurer’s financial records.

The annuitant’s legal interest is thus limited to the receipt of an annuity income on the basis stipulated in the annuity contract but always subject to the relevant legislation, the most important being that the living annuity may not be commuted for a single payment other than in very limited circumstances as set out in Government Gazette No. 31554 dated 30 October 2008. There exists no mechanism to dip into the underlying capital for a lump sum payment.

What about subsequent beneficiaries?

The commutation rules as set out above apply in respect of an annuity payable to the original annuitant as well as an annuity payable to a beneficiary appointed by the original annuitant.

The definition of “living annuity” specifically makes provision for this by defining it as:

• The right of a member to an annuity;
• The right of a dependant or nominee to an annuity
• The right of any subsequent nominee to an annuity

A beneficiary of a living annuity (i.e. the subsequent nominee) will therefore also have the right to commute in the circumstances stated above.

Can you commute a living annuity upon emigration?

No, you can’t.

Sub-par (c) of the definition of living annuity (quoted above) is the only provision which makes provision for commutation and it is narrowly drafted to limit it to when the value of the living annuity is R50 000 or less (if any value of the annuity or any part of the retirement interest was previously commuted for a single payment) or R75 000 or less (in any other case).

Furthermore, it would in all likelihood not be an option to transfer the living annuity to a foreign insurer when you exit South Africa. Transfers of living annuities are regulated by the Long-term Insurance Act (LTI Act), specifically directive 135 read together with directive 135A.

In terms of the above-mentioned you can only transfer to another “insurer” as defined in the LTI Act, being “a person registered or deemed to be registered as a long-term insurer under the Act”. A foreign entity would typically not fall within the definition of an “insurer” as per the LTI Act.

Conclusion

The law limits the instances in which a living annuity may be commuted; the insurer is bound thereto and cannot make an exception.