How can I appeal against full commutation rejection?

Question:

I had two Old Mutual RAs in 2010. At that time I arranged with Liberty Life to transfer one of these Old Mutual RAs to Liberty Life. This RA was then combined with a Liberty RA which I had to form one living annuity. I also have a Coronation Living Annuity which I transferred my retirement fund from my employer into in 2009. I never withdrew any tax-free lump sums from these retirement annuities or my retirement fund when these living annuities were taken out. I have now requested Old Mutual to cash in the remaining retirement annuity in full, as the value is less than R75 000, as I have as of yet taken no tax-free lump sums. Old Mutual replied to me to say that I do not qualify for full commutation as I transferred the previous retirement annuity to Liberty in full (three thirds transfer in their terminology) of about R280 000 in 2010. Is this correct, and if so, why? If they are correct, then as another alternative, would it be possible for me to transfer this amount of about R54 000 to Liberty Life and use it to top up the living annuity I have with Liberty Life?

Answer:

David,

The issue is that SARS tends to view retirement annuity and retirement fund matters in aggregate, rather than on a policy by policy basis. Otherwise it would become too easy to circumvent the provisions of the Income Tax Act. So instead of taking out one retirement annuity, an investor may take out a number of retirement annuities, with the aim that each will be less than R75 000 at maturity, and that each can then be cashed in individually. So SARS, and some service providers by default, take a holistic view of the investor's investments and if the total value of all retirement annuities exceed R75 000, then this full commutation option falls away.

In this case, Old Mutual may believe that you deliberately moved your retirement annuity, to evade this aggregation principle, and it may be a policy of theirs to reject full commutation requests in such circumstances. You can try to appeal against full commutation rejection, by submitting all the required documents, proving that you did not take a cash lump sum from your other retirement annuities and that you did not move the other Old Mutual RA to obtain an advantage in this regard. And given the the one-third cash lump sum portion of your three combined retirement annuities would be in excess of R54 000, you should therefore be allowed to commute the remaining retirement annuity, to benefit from the tax-free lump sum portion available in our tax regime. If you demonstrate your bona fides, the Old Mutual fund trustees may exercise some discretion in this regard. This may take some time and effort, and your appeal may be rejected, so you need to decide whether it is worthwhile going to all that trouble for a relatively small amount.

You will be entitled to transfer the balance of your Old Mutual RA to your Liberty Living Annuity. You would in any event struggle to find a life company that would offer you a separate living annuity on such a small balance.