Question:
I have since received the death benefit amount and the insurance company told me that they will only calculate the interest once I make a decision on the options given, which are: 1) Annuity or 2) Cash payout. This obviously makes it a little harder to decide what I should do, but I have spoken to an advisor about re-investing the money for me. I know the insurance company has to apply for an IRP3 for my late father and have requested all my details as well. Will I be liable in any way for tax that may be outstanding by me?
Answer:
Renee,
If you opt for a lump sum, this is deemed (for income tax purposes) to have accrued on the day prior to your father’s death, and is taxed as it would have been in your late father’s hands. Under normal circumstances, the lump sum tax tables on retirement would apply, ie the first R315 000 would not be taxed, the second R315,000 at 18%, the third at 27%. The balance of the benefit (above (R945 000) is taxed at 36%. Any previous cash lump sums claimed on withdrawing from a fund would be set off however (ie one cannot claim the tax-free portion more than once). The tax-free portion of the lump sum will be increased by any contributions made to the fund that were not allowable as tax deductions.
As your father passed 12 years ago (and such matters are normally resolved within 12 months), it is not clear whether the old rules (effective before 1 October 2007) would apply. These were a bit more complicated. The tax directive will clarify this.
If you choose an annuity, no lump sum tax will apply. The full amount is transferred to the annuity. The proceeds of the annuity will then be taxed as income in your hands as per the prevailing income tax tables. You can also split the benefit and take part as a lump sum, and part as an annuity. The tax rules for each – as described above – would then apply (so you could potentially take out R315 000 tax free and convert the balance into annuity).
Some warnings: 1. You are not required to purchase the annuity from the life insurance company that managed the retirement fund. Feel free to shop around for the best rate. 2. It makes no sense that the outstanding interest is dependent on whether you choose a lump sum or an annuity. 3. Make sure you do not incur unnecessary fees by engaging an adviser and paying high commission charges on recommended products.
