3 November 2004

South Africa: Unclaimed Pension Pile Reaches R6bn

Johannesburg — Tax problems can arise when staff quit

THE South African retirement fund industry is sitting on more than R6bn in unclaimed benefits, according to some estimates.

Employers as well as employees need to take the issue of pension and provident fund benefits more seriously," say tax experts and analysts. Employers face tax implications when employees leave without having elected the retirement fund benefit that accrues to them.

Unclaimed benefits usually arise when employees terminate their employment and, in most cases, out of ignorance, do not claim their share. In such cases, the administrators of the fund would classify the benefits, after the expiry of a certain period, as "unclaimed benefits".

The factors that determine when and how a benefit becomes unclaimed differ from administrator to administrator.

David Geral, a director at commercial law firm Bowman Gilfillan, says it is the experience of many funds that some members who are entitled to a benefit do not claim because they are unaware of their entitlements.

"The approach that has been adopted by the South African Revenue Service (SARS) is that such unclaimed benefits have accrued to members and are amounts that the fund becomes liable to pay at the time of the accrual," says Geral.

He says the SARS has been issuing assessments requiring funds to deduct and remit employees' tax in respect of the total value of unclaimed benefits.

One of the issues facing a number of funds is that the receiver has applied a rate of 30% in determining the amount to be deducted.

Geral says the rate represents a higher average tax rate than that applicable to members who have failed to claim their benefits.

"In some instances, the SARS has agreed to reduce the assessment rate to 18%, which is the minimum rate in terms of the Income Tax Act."

However, former members who have not claimed their benefits may have not earned sufficient income to reach even the lowest income tax threshold.

If such a person were to eventually claim, he or she would have to submit an income tax return to obtain the refund of the tax over-deducted by the fund, Geral says.

Mike Galloway, director of linked investments at Stanlib, says a number of options are in fact available to employees when they leave.

They should carefully consider these when leaving their retirement-funded employment.

These include electing a deferred pension in the existing employer fund; transferring the benefits to their new employer's retirement fund; or transferring the benefit into a single-premium retirement annuity fund.

The SARS recently issued a general note dealing with the taxation of unclaimed benefits in the retirement and pension fund industry.

The note says that a benefit will become unclaimed only when a beneficiary fails to claim it within a reasonable period of time regarded as being six months after the benefit has accrued.

Galloway says this can arise where an employee's job is terminated and he or she fails to make an election and does nothing about the money invested in the pension or provident fund.

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