Retirement Annuities: The new trust

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By Remay de Kock and Kezia Talbot

Considering the various legislative changes to Trusts over the past year, a lot of speculation has emerged on the future of Trusts as an estate planning tool.

Remay de Kock

Although Trusts have been placed under the spotlight, the purpose of the Trust and the circumstances of each client should be the determining factors in deciding to create a Trust. When considering the appropriateness of a Trust, the following factors are taken into account in order to determine the suitability thereof:

  1. Growth pegging of assets
  2. Protection of assets from creditors
  3. Tax implications
  4. Circumstances of each person

If a Trust, however, taking regard to recent changes in terms of Section 7C of the Income Tax Act and the above mentioned factors and costs, do not meet your expectations, then consideration of the use of a retirement annuity might just tick all your boxes. Retirement Annuities (RA) have become a popular estate planning tool as a result of, not only, the tax savings opportunities, but also the benefits of using an RA to achieve growth outside of your estate.

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Albeit the fact that both a Trust and RA have a place, taking into account the circumstances of each person, it is worthwhile to mention the benefits of a RA as an alternative to the use of a Trust. To further argue the popularity of the RA in recent years, an increased tax deduction for retirement savings from 15% to 27.5%, has only made this planning tool more attractive as a substitute for trusts.

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Take the following table into account to compare the similarities between the two vehicles. Except for the significant difference in structuring of payment, the similarities are uncanny.

Factors Trust Retirement Annuity
Growth Pegging Growth takes place within the Trust Growth of assets takes place within the RA
Protection from Creditors Separate legal entity, thus protected from creditors Protection from creditors in terms of Section 37A and B of the Pension Funds Act.
Tax Implications when assets are placed in the Vehicle 1.    Subject to Donations Tax at 20% for donations less than R30m or 25% for donations greater than R30m in any tax year; or

2.    Capital gains Tax Implications when sold to the Trust; or

3.    Interest at the official rate on funds loaned to the Trust.

Contributions qualify for an income tax deduction:

Limited to the higher of 27.5% of remuneration or taxable income, subject to an annual ceiling of R350 000.

Tax implications on income received within the Vehicle Taxed according to the conduit principle at marginal rate of beneficiary;


Taxed within the Trust at 45%

Taxed within the Four Funds Approach at 0%
Estate Duty implications Separate legal entity – thus no estate duty implications Does not form part of your estate – thus no estate duty implications.
Liquidity Discretion of Trustees in terms of the Trust Deed to distribute income/capital to beneficiaries. Funds are only available at death, retirement, retrenchment;

At death, the Trustees of the Fund have a discretion in terms of section 37C of the Pension Funds Act of distribution of funds to dependants – thus beneficiary nomination not binding.

If we take the table above into account, the advantages of an RA when compared to that of the Trust confirm that should a trust not be the best suited vehicle, an RA can be the second best, if not, in certain circumstances, the best replacement for your specific purpose.

Kezia Talbot

The Minister of Finance, in his 2018 Budget Speech, announced a long-anticipated amendment to the rate of estate duty. With effect from the 1 of March 2018, estates with a net asset value of less than R30 000 000 will be subject to estate duty at the rate of 20%, and for those estates with a value greater than R30 000 000, the rate increases to 25%. For those persons who fall into the latter category, it may be prudent to take advantage of RAs in order to ensure that, as far as possible and taking into account annual limits applicable to RAs, your dutiable estate falls below the R30 000 000 bracket, so as to reduce your estate duty liability while still ensuring that your dependants are financially provided for.

There isn’t a one size fits all answer to the ongoing questions around the future or suitability of trusts, but it might reassuring to know that there are other options available to suit your specific circumstances.