wife swopping and tax
30 September 2008

Question:
May I, as the insured, when I retire nominate my wife to be the annuitant of my retirement annuity if there are tax advantages?
I will still be earning a salary whilst my spouse will have no other taxable income. She is currently the beneficiary of the retirement annuity (Old Mutual Flexi Pension).

Answer:
There are two issues here that I would like to clarify.

Firstly, as the owner of the Old Mutual Flexi Pension, a retirement annuity, you are the retirement annuity fund member. Membership cannot be transferred to another person in any way. You, as the member, will therefore at retirement become entitled to receive an annuity, pension or income from at least two-thirds of the total retirement benefit. You may choose to utilise the full value of the benefit to secure an annuity as well should you wish to. The person receiving the annuity is termed the annuitant. On a retirement annuity product, only the owner or member may be the annuitant. There is no way for you to legally substitute your wife as the annuitant.

In recent years, sections have been inserted into the Income Tax Act that specifically aim to curb any form of tax avoidance. A specific section in fact prohibits a person from donating income-generating assets to a spouse in order for the income tax to be paid by the spouse. In such a case, the income will be deemed to be that of the donating spouse and taxed in his or her hands anyway. So, when it comes to passing a tax liability onto another person who pays tax at a lower rate, legislation doesn’t allow for such a benefit.  The short answer to your question is therefore no, your wife cannot be the annuitant on your retirement annuity. Any scheme that aims to avoid or reduce a person’s tax liability should in fact be avoided as the Income Tax Act and its sections nullify any benefit. In fact, the provider of the annuity portion is obliged to deduct income tax from the gross annuity before paying over net annuity/pension to the annuitant.

The second point I want to highlight is that one needs to beware that there is a difference between an annuitant, as described above, and a beneficiary of your retirement annuity. While the annuitant is the person receiving the income or pension after retirement, the beneficiary is the person who will receive the benefit from the fund on the death of the member if he or she dies before retirement. What this practically means is that if you die before you retire from your retirement annuity, your beneficiaries will receive the death benefit from the retirement annuity. It is important to note, though, that in the context of retirement funds, the trustees of the fund will decide exactly how the death benefit is distributed. They need to consider everyone who was legally or factually dependant on the member and distribute the benefit in the correct proportions to all the dependants. So while you may have nominated your wife only, keep in mind that the trustees may pay a portion of the death benefit to another person who may also be dependent on you at the date of your death.

Riëtte Brune, http://personalfinance.iafrica.com