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   Pre Course Reading / Reference Material


           UNIT STANDARD 10394




US10394      Pre Course Reading / Reference Material                                    1
   NOTE TO ALL USERS OF THIS COURSE.

   A LARGE PARTOF THIS COURSE IS BASED ON THE
   FACT THAT THE LEARNER IS FAMILIAR WITH THE
   VARIOUS DIFFERENT TYPES OF PENSION FUNDS,
   RETIRMENT FUNDS AND PROVIDENT FUNDS .

   TO HELP WITH THIS INFORMATION WE HAVE A
   INCLUDED A PRE COURSE READING DOCUMENT
   THAT SHOULD BE READ THROUGH BEFORE
   ATTEMPTING THE COURSE.

   IT IS ALSO SUGGESTED THAT ALL USERS OF THE
   COURSE OBTAIN A COPY TO THE PENSIONS FUNDS
   ACT AND ITS REGULATIONS AND ITS AMENDMENTS.




US10394        Pre Course Reading / Reference Material   2
1 Section 1: Explanation of Terms1
    Please note that in this section we have tried to explain a number of terms and
    concepts in a simple and readable manner. Often these terms and concepts are a
    lot more complex and we suggest that should you be interested in learning about
    them, that you study the detail further.

    Investment policies

    Investment policy
    An investment policy is a financial product aimed at providing some form of growth on
    your savings. This is done, not only to provide you with a larger sum of money at a future
    date, but also to ensure that the value of your money is not depleted by inflation. The
    purpose should be to maximise the return on your money. An investment policy does
    exactly that, as it does not have other features like life or disability cover that needs to be
    funded from your investment. You may invest by means of a single premium or recurring
    premiums and the benefits are normally paid out after a contractual period of five years or
    longer term.

    Risk
    One of the most important factors in any investment is to make a sensible assessment of
    the risk. The old adage of 'the higher the potential growth, the higher the risk' is very true.
    Always keep that in mind in making an investment. The factors to consider in evaluating
    the risk is the type of investment your particular fund invests in, how the portfolio is
    compiled from the various types of investment. Furthermore, the strategy of the
    investment manager also influences the level of risk.
    The types of investments in which a fund can invest include shares in listed companies,
    either listed on the Johannesburg Stock Exchange or on overseas stock exchanges,
    property, interest bearing investments (such as government bonds or money market
    funds) and cash. The composition of the fund's portfolio plays a part in the fund's risk
    level. For instance, a fund that invests mostly in shares will carry a higher risk than one
    investing in cash.

    Guarantees
    In volatile investment markets some investors look for ways in which to protect their
    investments against a possible decline in the market. For this reason some funds offer
    guarantees. Keep in mind that high potential growth and guarantees are mutually
    exclusive. There are, however, instances when guarantees are needed to protect your
    investment. For instance, if it is your only retirement capital, you do not want to expose it
    to unnecessary risk.

    Examples of the kind of guarantees you can expect is a guarantee for a minimum
    investment return or a guarantee that later fluctuations in the market will not affect the
    growth that you have already earned, thereby letting you keep the good of the good
    times, whilst not exposing you to the bad of the bad times.

    Guarantees come at an additional cost of around 1-2% of the investment per annum.

    Investment funds
    An investment policy offers investors, big or small, the opportunity to invest in an array of
    investment funds. This makes it easy as very view people have the financial knowledge
1
    1
1       Courtesy of Sanlam Insurance Company Ltd


US10394                     Pre Course Reading / Reference Material                      3
   to manage their own investment portfolios.

   Guaranteed Capital Fund
   As the name implies this fund guarantees your net investment during the entire term of
   the investment. This is a low risk fund. The growth in the fund is added to your
   investment as a bonus that becomes part of the investment and cannot be lost. Bonuses
   are added daily or monthly, depending on the type of investment. All the accumulated
   bonuses are payable when the investment or policy matures. In terms of current tax
   legislation, these bonuses are tax-free.

   Vesting Bonus Fund
   This is a relatively new investment fund which aims to produce steady growth over a long
   term. Any growth forms part of the investment and cannot be removed if market
   conditions deteriorate. It remains in force for the full term of the policy until it matures.

   The growth on the policy takes place by bonuses being declared, based on the expected
   long-term return on the fund. Up to 70% of the fund can be invested in shares. It is a
   suitable investment fund for those who invest in a Capital Growth or the a Retirement
   Annuity.

   Balanced Fund
   This fund provides a balance between maximum capital growth and security in the
   medium to long term. It is a market-related fund, which means that it can fluctuate in line
   with prevailing market conditions. The purpose of the fund is stable growth over the
   longer term.

   Up to 70% of the fund may be invested in shares, with the rest being invested in property
   and interest-bearing investments with the aim of maintaining a sound balance between
   the two.

   An optional guarantee can be added to this fund that will assure you minimum growth of
   4,5% per year on the net investment.

   Equity Fund
   This fund is suitable for the investor who wants maximum growth on his investment and
   is prepared to accept the risk of market fluctuations. Through the fund's investment in
   shares on the Johannesburg Stock Exchange, the investor gains exposure to the growth
   potential of dynamic South African companies.

   The growth in the fund is determined by growth in the underlying assets, in other words
   those shares that have been invested in, and fluctuates according to movements in the
   market.

   The risk level is high and no guarantees are offered.

   Fund of Funds
   This fund offers an easy way of investing in a variety of South African unit trusts, without
   the hassle of having to decide on the exact funds for yourself. The fund's sole purpose is
   maximum returns and the fund manager's mandate is to outperform 75% of all South
   Africa's unit trusts.

   The fund is exposed to market conditions and growth does not vest. The risk is moderate
   to moderately high, but because the fund invests in a variety of unit trusts and the risk is
   therefore spread, it is lower than if you were invested in a single unit trust, for example



US10394                    Pre Course Reading / Reference Material                     4
   Policies and endowments

   Agent
   An agent, or tied agent, is an insurance sales person that works for one particular
   company and sells the products of that company only. The term agent has been
   substituted for advisor during the recent past and some companies allow certain advisors
   to sell products from competitors and refer to them as independent advisors.

   Accident cover
   Accident cover can be taken out as either a separate policy or as a rider benefit on a life
   assurance policy. It insures you against the effects of accidents or violent situations in
   which you may lose a limb, your eyesight, your hearing or even your life. It differs from
   disability cover in that should you for instance lose a limb and you are not perm anently
   disabled; you will still be paid out the benefits of the policy.

   Annuity
   An annuity is a policy that pays out a regular payment to the policyholder, called an
   annuitant, as long as he or she is alive. These payments may start immediately (after an
   amount has been invested in the annuity) or deferred to some future date, i.e. an
   immediate annuity or deferred annuity. The payments may be made monthly or annually
   and may be for a specified term or for the remainder of a person's life.

   Do not confuse this annuity with a retirement annuity, which is a specialised savings
   product aimed at making financial provision for retirement.

   The above annuity is usually bought with retirement savings after which the payments
   serve as retirement income, or pension.

   Beneficiary
   The policy beneficiary is the person the policy will pay out to. It may be anyone
   designated by the policyholder. It is better to always name a beneficiary in your policy, as
   it will ensure that should you fall away it will pay out directly to that person.

   Broker
   A Broker is a financial advisor who is not attached to any specific assurance company
   and therefore may sell the products of more than one company. It is a fallacy that brokers
   are necessarily more competent or unbiased towards certain products simply because
   they are independent. They also get paid commission on the products they sell.

   Direct marketing
   This is a sales generating section of the insurance company that deals with clients
   directly and sells financial products - normally non-complex products - directly to the
   client without the assistance of an intermediary. It is usually done by means of mail shots,
   telephone sales or media advertising.

   Disability cover
   Disability cover works in a similar manner as life assurance and also falls under the
   category of risk cover. In short it means that you enter into an agreement with the life
   assurer to provide you with a certain amount of money in return for your monthly
   premium to cover the risk of you becoming permanently disabled. This is to ensure that
   you have money available for your family when you are no longer able to provide for
   them because of your disablement. Disability cover can be taken out on its own, or as an
   extra (rider) benefit on a life assurance policy. When taking out disability cover it is very
   important to note the definition that particular company attaches to the term disability.



US10394                    Pre Course Reading / Reference Material                     5
   Endowment
   An endowment is a policy, which is taken out for a specific term. Put simply, it is a
   disciplined savings plan in which you agree to save a certain amount each month for a
   specific period of time, normally five or ten years, and the life assurer agrees to pay out
   the investment returns by that date. Most endowments also offer choices of where you
   want the money invested and the risks you are prepared to accept. You can add life
   assurance to an endowment. At your death it will pay out the larger of either the agreed
   death benefit or the investment return.

   Exclusions
   Some life assurance policies define situations or happeni ngs under which they will not
   pay out. These are called exclusions and may include such happenings as suicide
   (particularly within a certain time after the inception date of the policy) or taking part in
   dangerous activities, e.g. flying or mountaineering.

   Financial advisor
   The financial advisor is the person who assists one in drawing up a financial plan by
   taking into account one's risks and investment goals. He or she should have the relevant
   product knowledge and insight to advise one on the best method of attaining those goals.
   A financial advisor may or may not be attached to a specific assurance company. They
   get paid a commission on the products sold.

   Funeral cover
   Put simply, funeral cover is very similar to life assurance, but specifically aimed at
   covering your funeral costs. If you have enough life assurance you normally do not need
   to take out funeral cover, but should you have nothing else; this is a way to ensure that
   your next of kin are not burdened with additional financial problems after your death.

   Insured
   The insured person may or may not be the policyholder. The insured in a life assurance
   policy, for instance, is the person whose life is assured. Therefore, the policyholder, the
   owner of the policy, can take out assurance on someone else, the insured person's, life.
   This usually happens in business agreements between partners.

   Key person assurance
   Key person refers to an employee in you business that is of particular value to the
   ongoing success of your business. It is good practice to ensure this person's life or
   against disability as it may have a detrimental affect on the business should he or she fall
   away suddenly. The practice of assuring such a person is referred to as key person
   assurance.

   Life annuity
   A life annuity refers to the pension, which you have to buy with the returns of your
   retirement annuity. The working of this is simpler than it looks. Your retirement annuity is
   the savings vehicle for retirement. When you reach that age, you draw the money and
   buy a pension from a life assurer, which is then paid out monthly for the rest of your life.
   Because of the tax benefits you have during the savings phase you are obliged to buy a
   pension - the life annuity. There are a number of different options when buying a life
   annuity that can be structured to your specific needs.

   Long-term assurance vs. short-term insurance
   All kinds of insurance have one thing in common. It protects one against the negative
   financial impact of certain risks. The main difference between long-term assurance and
   short-term insurance is the risks it protects you against. With long-term assurance you
   are covered against the risks of death, disablement or old age. With short-term


US10394                    Pre Course Reading / Reference Material                     6
   assurance you cover your property against theft, fire or other means of losing it. Long-
   term assurance gives you both peace of mind and an investment - at some point in the
   future the policy will pay out - whilst a short-term policy gives you peace of mind, but
   there is no investment that will pay out at the end of a term.

   Paid-up value
   In certain instances a policy may be made paid-up in stead of surrendering it. It means
   that the policy will not lapse, although it is free of further premiums. Note that a policy can
   only be made paid-up if it has a surrender value.

   Policy
   A policy refers to the contract between you and the life assurer. The policy document
   serves as a record of what has been agreed between you and the life assurer and binds
   both parties to that agreement. The policy can refer to either a structured savings plan or
   a life assurance and sets out the premium you have to pay and the conditions under
   which the life assurer will pay out at either maturity date or at death. The policy document
   can also contain the name of your beneficiary in case of a life assurance, in which case it
   will pay directly to that person when you die.

   Policy benefit
   A policy benefit is much the same as its proceeds, but whereas proceeds refer more
   directly to investment policies, benefits relate more to risk policies, life or disability. Both
   have to do with the policy 'paying out'.

   Policyholder
   The policyholder is the person in whose name the policy is registered. It may or may not
   be the same person as the one who stands to benefit from it. For example, one may take
   out a life policy and although you are the policyholder that policy will eventually be paid
   out to someone else. Most policies are payable to the policyholder but he or she has the
   right to make it payable to someone else.

   Policy proceeds
   The proceeds of a policy refers to the combination of your investment, either by way of
   recurring premiums or a single premium investment, plus the investment growth that is
   paid out to you after the policy term, usually five or ten years with new generation
   policies, but may be longer, as in the case of certain endowment policies or retirement
   annuities.

   Policy returns
   The returns on your investment policy is basically the same as the proceeds and relates
   mainly to what you got back from the assurance company in return for what you
   invested.

   Premium
   When one takes out a policy, any policy, your premium will be the agreed amount that
   you pay according to your contract with the assurance company to enable you at some
   later stage to reap the benefits of the policy. A premium may be paid monthly or annually
   in which case it is referred to as a recurring premium. A once off investment is called a
   single premium investment.

   Pure endowment
   A pure endowment is a policy that only pays out a benefit at the end of a specified term. It
   can therefore also be called a savings policy. Should the policyholder die during this term
   the policy will only pay out the accrued value up to that point in time.



US10394                    Pre Course Reading / Reference Material                       7
   Retirement annuity
   A retirement annuity, or RA, is a savings plan specifically tailored to provide money for
   your retirement. As with other types of policies you agree to pay a certain amount each
   month in return for a lump sum and monthly pension after you retire, between the ages of
   55 and 69. As an incentive to save for retirement the government gives tax relief on
   premiums paid towards a RA. It also offers other benefits like protection against creditors.

   Rider benefit
   A rider benefit is an added benefit on your risk policy. For instance, if you take out a life
   assurance policy you may add 'trauma cover' or 'accident cover' as rider benefits for a
   small additional premium. Should you then be diagnosed with a specified illness in the
   case of trauma cover or lose a limb in a motor car accident in the case of accident cover
   the assurance company will pay out a specified amount of money to you. Usually this
   does not affect the benefits of your original life policy.

   Surrender penalty
   The surrender penalty refers to the deductions made when a policy is surrendered.

   Surrender value
   Whole of life or endowment policies build up a value over time and should one wish to
   end the policy before the end of its normal term, the insurance company then decides on
   a surrender value, i.e. the monetary value of the policy at that time to be paid out to you
   in a cash amount after which the policy lapses.

   Term assurance
   Term assurance is very similar to a whole life policy with the exception that it is valid for a
   specific term, which you agree with the life assurance, say ten or twenty years. This
   means that should you die within this period the policy will pay out the agreed amount to
   your next of kin or beneficiary. Term assurance is usually bought to cover debt, for
   example if you buy a house, a car or even a business, on credit and you want to ensure
   that your family don't inherit this debt. The benefit that is paid out, therefore, goes
   towards covering your debt. Should there be a balance it will go towards your next of kin.

   Trauma cover
   Trauma cover is also mainly used as a rider benefit on a life assurance policy. It refers to
   a list of serious illnesses, for instance cancer, a stroke, or a heart attack, and you ensure
   yourself against it by taking out trauma cover. Should you then be diagnosed with any of
   these illnesses, the assurer will pay out an agreed amount.

   Unit trusts
   Apart from policies, assurance companies also sell unit trusts. A unit trust is not a policy;
   it is basically a pool of money to which many people contribute, that is invested by
   experts called portfolio managers, mainly in shares on the Johan nesburg Stock
   Exchange (JSE), as well as in securities and cash. It is used mainly for investment.

   Whole life policy
   A whole life policy is life assurance in its simplest form. It falls into the category of risk
   cover. You enter into an agreement with a life assurer to ensure your life for a certain
   amount of money to be paid out to your next of kin when you die. The policy is kept alive
   for as long as you live and keep paying the agreed premium. This is the most basic form
   of financial planning as it ensures that your family can be looked after when you can no
   longer.

   Retirement funds



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   Added benefits
   Members of retirement funds have the benefit of life and disability cover added to their
   retirement benefits. Some of these benefits may be taken out without any medical tests
   up to certain limits. Because retirement funds are operated on a group basis the costs
   involved for providing these benefits are somewhat cheaper than what it would otherwise
   be.

   Capital
   This is the total amount that you have saved for retirement. This money should be then
   be invested to earn interest to enable you to draw a regular monthly income, or pension.

   Compound interest
   When you invest money in a retirement fund you will earn interest. Compound interest
   (as opposed to simple interest explained below) means that you earn interest, not only on
   your investment, but also on your investment plus the interest earned in the previous
   years, meaning that you earn interest on interest.

   Cross subsidy
   By pooling the money of a number of employees into one fund one is able to use some of
   everyone's money to the benefit of everyone. A little bit of mine helps you and a little bit
   of yours helps me.

   Deferral of tax
   The amount that you contribute towards providing for retirement, up to 15% in certain
   instances, may be deducted from your income before tax is calculated. This has the
   effect of you being taxed on a lower amount - your actual income less your retirement
   contributions. It does not mean that you will not have to pay tax on that money. The
   payment of the tax is deferred until retirement.

   Defined benefit fund
   This type of fund is based not on the contributions, but on the promise of a defined
   benefit, or pension, to be paid to you after retirement. When you leave the service of your
   employer before retirement age, you will only receive part of the accrued money in the
   fund. At retirement you will receive a monthly pension in stead of being paid out the full
   amount, although you may take up to one third of the value in cash.

   Defined contribution retirement fund
   This type of fund is based on a regular fixed contribution made by you and your employer
   to the fund. At retirement, or earlier if you leave the service of your employer the
   combined contributions, plus the accrued growth from the investment of your money is
   paid out to you. The idea is that you should use this money to purchase a pension.

   Lump sum
   Your lump sum at retirement refers to the cash amount that you are allowed to withdraw
   from your retirement fund. You are, according to current legislation, allowed a lump sum
   withdrawal of up to one third of your accrued retirement savings of which the greater of
   R120 000 or R4 500 X n, where n constitutes the number of years that you contributed to
   a particular retirement fund is tax free.

   Retirement fund
   A retirement fund works in very much the same as a savings policy, but in this case it
   offers you a specialised vehicle to save for a very specific reason - retirement. It sole aim
   is to provide money for the years of your life following your retirement. Most employers
   offer a retirement fund as it gives them an opportunity to providing added benefits to
   employees. The government also offers generous tax savings on retirement fund


US10394                    Pre Course Reading / Reference Material                    9
   contributions.

   Simple interest
   Simple interest is straight forward interest, for instance, if you invest R1 000 at a simple
   interest rate of 12% per year, you will earn interest of R120 making your saving a total of
   R1 120 after the first year. For as long as your money is invested you will earn 12% per
   year, i.e. R120, that is added to your original investment of R1 000.

   Tax rate
   Income tax is levied on your income at a certain rate; either your average tax rate or your
   marginal tax rate. One's average tax rate is the actual amount of tax paid, divided by your
   taxable income, and multiplied by 100. Your marginal tax rate would be the percentage of
   tax you pay on any additional income you earn. Your average tax rate is the friendlier
   one.

   Investments

   Direct investment
   A direct investment means that you hold an underlying asset, like a share, a gilt or
   property, directly opposed to an indirect investment such as a unit trust.

   Equity
   Equity is ordinary shares in a company and gives the holder of such shares a share in the
   residual profits of a company, after claims.

   Real rate of return
   Your returns are what you get out of making an investment. One invests money in the
   belief that it will be "returned" to you at a later stage, showing an amount of growth. The
   "real rate of return" refers to your returns after taking into account the effect of inflation on
   your money - i.e. your return after inflation.

   Assets
   An asset can be almost anything that has a monetary value where such an asset has a
   tendency to hold its real value in times of unexpected high inflation. Usually it means
   physical, tangible assets such as gold or property.

   Security
   In investment terms it refers to as to the measure of certainty with which one can expect
   income or that capital will be repaid. It also refers to the measure in which an investment
   can be traded. Sometimes, however, it includes any investment, whether it can be traded
   or not.

   Fixed interest stock
   A security invested for a defined term where interest and capital repayments are fixed at
   the outset.

   Gilt
   This is fixed interest stock issued by the Government. The aim is to raise money through
   drawing investments with which to finance public sector borrowing.

   Put
   Put options are securities that give the holder the option of selling the specified stock. It
   refers to the right to sell specified stock at a specified price at specified times. A "put"
   facility on a bond would give the holder the right to repay the loan.



US10394                     Pre Course Reading / Reference Material                      10
   Bond
   A bond is a binding agreement for a borrower to pay a lender specified amounts of
   money at specified times, for instance your loan agreement with the bank to finance your
   house, is referred to as a bond.

   Convertible loan stock
   It is a bond that may be converted into something else on specified terms, usually into
   shares in the same company.

    Property
   Property can also refer to anything that can be owned, but in investment terms it means
   land or buildings - what the Americans call "real estate".

   Option
   An option is a contract between two parties, where the one party sells the other an option
   to either buy or sell a given asset on specified terms. Options can be traded.

   Bill
   This is an investment of a very short term, where the investor buys the right to receive a
   specified amount of money at a specified date.

   Bill of exchange
   This is a bill that arises out of the sale of goods on credit. The bill for the amount owing is
   then sold to a bank at a discount to face value, after which the bank guarantees
   repayment and sells it into the market where it becomes a tradable security.

   Cash
   Cash is a very short-term investment earning short-term interest, like treasury bills and
   bank deposits.

   Money market
   The money market is the market for short-term assets.

   Capital Market
   The capital market is the market for long term securities.

   Bull market
   This is a period of time during which investors are generally confident and stock market
   prices are on the increase. It is the opposite of a bear market.

   Bear Market
   This is a period of time where stock market prices are on a decline and investors are
   generally unconfident.

   Offshore investments

   Offshore banking
   Offshore banking is somewhat different to offshore investing. Investing has to do with
   saving your money in a particular investment product with the purpose of growth and
   eventually good returns. Offshore banking, on the other hand, is a facility that offers
   access to overseas financial and banking services. It enables one to make purchases or
   payments anywhere in the world, offering an option of currencies such as pounds
   sterling, US dollar and the Euro.

   Offshore investment


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   Investing offshore, as the name implies means taking your money outside the borders of
   your own country and investing it in overseas markets. The main reason for wanting to do
   this is to spread the risk of your investment over more than one economy. This ensures
   that should the South African economy experience a downward trend, at least some of
   your investment is stashed in another country and in another economy, thereby
   protecting it against the possible negative returns you may experience locally. Offshore
   investments can take place in one of two ways, in rands and in an offshore currency.

   Rand hedging
   Rand hedging is another very good reason for investing offshore. Over the past few years
   the South African currency has shown landslide depreciation compared to the major
   currencies of the world, e.g. the British Pound and die US Dollar. By investing some of
   your money in these currencies you would have benefited from this decline in the value of
   the rand.

   Rand-denominated offshore investments
   With rand-denominated offshore investments the fund manager of your chosen
   investment portfolio uses the money that you invest (Rands) to purchase offshore
   investments by means of an asset swap with an offshore partner. It offers a choice of
   investment portfolios and offers excellent access to offshore investments for newcomers
   to the market. The returns are paid out in Rands.

   Investing directly in an overseas currency
   This method for investing overseas are for those investors who wish to have the
   proceeds of their investment paid out in an overseas currency. According to present
   regulations, South Africans may, on approval of the S.A. Reserve Bank, invest up to
   R750 000 overseas. This amount can be converted to any other currency for purchasing
   offshore investments and the proceeds are then paid out overseas in that country's
   currency. You will also need a tax clearance certificate from the SA Revenue Services.

   Examples of offshore investment funds

   Offshore Balanced Fund
   The Offshore Balanced Fund seeks a balance between optimal capital growth and stable
   returns. The fund manager's aim is to obtain a stable return in dollar terms. The fund
   invests in more stable markets and sectors, for example, in overseas government stocks
   and bonds as well as blue chip shares listed on stock exchanges in North America,
   Britain, Europe and Japan. Any decrease in the value of the rand against other
   denominations will increase the return on the underlying assets in the portfolio. It offers
   exposure to shares not available with an investment in South African equities.

   Offshore Equity Fund
   The Offshore Equity Fund is suitable for those investors seeking the potentially excellent
   capital growth associated with equity funds while wanting to benefit from adverse
   movements in the value of the rand against other currencies. The fund manager's aim is
   not only to achieve good performance in dollar terms, but also to benefit from a possible
   decrease in the value of the rand. It invests in blue-chip shares listed on stock exchanges
   in North America, Britain, Europe and Japan. Any decrease in the value of the rand
   against other denominations will increase the return on the underlying assets in the
   portfolio. This is a rand-denominated offshore fund and you do not need permission from
   the South African Revenue Service to make the investment.

   International Balanced Fund
   The International Endowment Balanced Fund offers a 100% offshore exposure in
   overseas assets with investments in equities, fixed-interest investments and cash in


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   selected foreign currencies. The share component of the fund consists of equities listed
   on overseas stock exchanges, whilst the fixed-interest investments consist of overseas
   government bonds.

   International Equity Fund
   The International Endowment Equity Fund provides the potential for the excellent capital
   growth offered by investing in equity funds, but can also include fixed-interest
   investments and cash in selected foreign currencies. The share component of the fund
   consists of equities listed on overseas stock exchanges.

   Worldwide Property Fund
   The Worldwide Property Fund is ideal if you wish to diversify into property investments
   with simultaneous exposure to both local and overseas markets as the fund manager is
   mandated to invest 50% of the portfolio in properties in South Africa and 50% in overseas
   assets. The fund comprises investments in commercial properties in South Africa and
   shares of overseas companies investing in commercial properties.

   World Wide Equity Fund
   The fund manager of the WorldWide Equity Fund is mandated to invest between 40%
   and 60% of the portfolio in the South African market and the remainder in overseas
   assets. The fund comprises investment mainly in equities, but can also include fixed-
   interest investments and cash. The share component of the fund is a mixture of equities
   listed on the Johannesburg Securities Exchange and overseas stock exchanges.

   World Wide Balanced Fund
   The Worldwide Balanced Fund offers simultaneous exposure to both local and overseas
   markets and in doing this provides a balance between maximum capital growth and
   security in the medium to long term. The fund manager is mandated to invest between
   40% and 60% of the portfolio in the South African market and the remainder in overseas
   assets. The fund comprises investments in equities, fixed-interest investments and cash.
   The equities are a mix of shares on the Johannesburg Securities Exchange and overseas
   exchanges

   Wills, estates and trusts

   Assumed
   Other persons nominated by the executor to be appointed as co-executor to assist the
   Executor of the estate or to represent him.

   Annexures
   This is an annexure to the will in which a variety of items are specified to be divided
   among specific heirs.

   Beneficiary
   A person receiving a benefit.

   Bequeath
   To award something to someone by means of a Will (to give).

   Capital gains tax
   This is a new prospective tax on capital gains. Should be implemented from October
   2001.

   Capitalize
   The income is reinvested and will be added to the capital.


US10394                   Pre Course Reading / Reference Material                 13
   Co-Trustee
   More than one person or institution appointed to administer the assets in a trust (capital
   and income) for the benefit of the beneficiary until termination of the trust.

   Codicil
   Addition to an existing will. It must comply with the same laws as applicable to wills.

   Creditors
   Persons who claim what is due to them.

   Declare
   Official declaration of your decision.

   Direct
   Command or order.

   Discountable
   To realise before the expiry date, with the deduction of a certain amount by way of a
   discount.

   Discretionary Trust
   This is a trust created in your will in which the Trustees are empowered to provide in their
   own discretion for the needs of the heirs concerned.

   Estate
   All a person's assets and liabilities.

   Estate duty
   A R1 million deduction is allowed for each estate. No estate duty is payable where the
   nett taxable estate (assets less liabilities and administration expenses and less bequests
   to the surviving spouse), is less than R1 million. Estate duty is payable at the rate of 25%
   of the nett taxable amount.

   Estate planning techniques
   These are estate plans you implement to reduce estate duty, income tax, VAT, etc.

   Execute
   To validate by signing.

   Executor
   An executor should be nominated, and it should be stated clearly whether he shall have
   power of assumption, and also whether he is exempt from furnishing security, if that is
   the testator's wish. Only persons as determined in the regulations to the Administration of
   Estates Act may be assumed as co-executors.

   The executor is the person or institution nominated in the will and whom the Master of the
   Higher Court will appoint in due course to administer the estate. This is a specialized field
   and needs knowledge and experience. A trust company which is nominated as executor
   provides security, knowledge and continuity as benefits for the client.

   An executor must always provide security, unless he is the parent, spouse or child of the
   deceased of the will, or a court of law has exempted the executor from providing security.

   Where an institution like a trust company is nominated as the executor, it will be regarded


US10394                      Pre Course Reading / Reference Material                  14
   as a mistake in the will if exemption to provide security is not provided for. The reason
   being       that      the         estate    is     reliable       for      the      costs.
   All a person's assets and liabilities.

   Expert
   A person with extensive and proven knowledge and experience of estate planning, wills,
   trusts and deceased estates as well as all laws and estate planning techniques that are
   involved.

   First dying
   The person who dies before another one. It will be either the husband or the wife in a
   marriage.

   Guardian
   In the absence of a natural guardian, one may be nominated in a will. Such a guardian
   must first be appointed by the Higher Court before he can act as such. The function of a
   guardian is to assist the minor in matters in which he is legally incompetent to act. The
   guardian must be exempt from furnishing security or he/she must provide the Master of
   the Higher Court with security.

   The guardian is not necessarily the person in whose care the minor is, but this is usually
   the case. Normally the trustees of the testamentary trust will administer the assets, while
   the guardian will administer the property and take care of the person of the minor
   child/children.

   Heir
   A person or institution who benefits from a will.

   Husband
   The man with whom a woman is married.

   Inheritances
   After the bequest of legacies has been detailed, the distribution of ordinary inheritances is
   set out. The inheritances will come out of the residue (balance) of the estate, after
   legacies (if any) have been distributed.

   Intestate succession act
   This is the law that prescribes how your estate will be divided, should you die without
   leaving a valid will (that is if you die intestate).

   Inter Vivos Trust
   This is a trust that you register and implement during your lifetime.

   Issue by representation per stirpes
   'By representation per stirpes' means that where a beneficiary predeceases the testator,
   his portion will devolve upon his children (the children of the beneficiary). In other words,
   if some of the children have already died, the predeceased child's inhereitance is divided
   equally amongst that child's children.

   Joint will
   A single document incorporating the instructions (will) of two or more persons which
   deals with the disposal of their estates at the death of any one of them.

   Legacies
   A legacy is a preferential bequest of specific assets before other inheritances (for


US10394                    Pre Course Reading / Reference Material                    15
   instance, the residue of the entire estate) can be taken into account. There is also a pre-
   legacy which is regarded as one having priority over an ordinary legacy. Such bequests
   are usually stated first of all when inheritances are detailed in the will.

   Liquidate
   This refers to the selling of the assets of a company, close corporation or a partnership,
   the payment of the the liabilities and the pay over of the residue to the shareholder,
   member or partner.

   Married in community
   The parties are married without a contract and they both own the joint estate (assets and
   liabilities).

   Married out of community of property
   The parties are married by an ante nuptial contract. There is no community of property
   and both parties own their own estate (assets and liabilities).

   Master of the Higher Court
   There are Master's offices in Bloemfontein, Cape Town, Kimberley, Grahamstown,
   Pietermaritzburg and Pretoria, with a Master in charge of each of the offices. The Master
   is been assisted by deputies, assistants and other personnel. They usually take care of
   the process of administering deceased estates, insolvent estates, minor's interests,
   curators and guardians.

   Minor
   A person under the age of 21 who has not been emancipated.

   Natural guardian
   Both biological parents are the natural guardians of a minor child.

   Per stirpes
   'By representation per stirpes' means that where a beneficiary predeceases the testator,
   his portion will devolve upon his children (the children of the beneficiary). In other words,
   if some of the children have already died, the predeceased child's inhereitance is divided
   equally amongst that child's children.

   Power of assumption
   The power of assumption means that an executor, guardian or curator, nominated in a
   will, can appoint another person to assist or represent him.

   Prodigals
   Persons that waste money and cannot handle their own financial affairs beneficially.

   Public auction
   This refers to the selling of an asset by public auction. The potential buyers bid against
   each other under the leading of the auctioneer, and usually the highest bid will be
   accepted. It must comply with several laws and it must be advertised very well.

   Public tender
   This refers to the selling of an asset by public tender. The public are invited (usually
   through the press), to provide a written tender on a spesific date. The highest tender will
   usually be accepted.

   Representation
   'By representation per stirpes' means that where a beneficiary predeceases the testator,


US10394                    Pre Course Reading / Reference Material                   16
   his portion will devolve upon his children (the children of the beneficiary). In other words,
   if some of the children have already died, the predeceased child's inhereitance is divided
   equally amongst that child's children.

   Residue
   The portion of the estate remaining which has not been specifically bequeathed. Unless
   the entire estate is specially bequeathed, a residuary heir must be nominated. (The
   spouse is normally the heir of the residue of the estate.)

   Revocation clause
   It is important that the testator, when making a new will, should revoke all previous wills,
   codicils, or any other document of a testamentary nature that he may previously have
   made individually or jointly with someone else, if it is his intention that they should be
   revoked. If he fails to do this, the provisions of such previous documents remain in force,
   and they will be read together with the new will. If there are contradictory provisions in an
   old and a new will, the provisions of the latter will apply. If a new will omits reference to
   assets bequeathed in an older will the stipulation in the old will as it concerns those
   assets can still be valid. The testator can also of course destroy a previous will, which will
   then not exist at his death.

   If a testator dies within three months from the date of his divorce or annulment of his
   marriage, his will shall be interpreted as though his former spouse had died before the
   dissolution of the marriage. However, should the testator have clearly indicated in his will
   that his former spouse must benefit despite the dissolution of the marriage, his wishes
   will be carried into effect. (Sec. 2B.)

   Security
   Where a cash amount or movable property due to a minor or unborn child is subject to a
   usufruct or fiduciary right, security will be required except when explicitly stipulated
   otherwise in the will. The law does not lay down any stipulations regarding the nature of
   the security and the Master normally requires a deed of suretyship or a mortgage bond. It
   regularly happens that wills do not contain stipulations in this regard and that security is
   then required but cannot be provided. If the will does not contain stipulations that it is not
   necessary to provide security, it is normally a mistake. If the legator however feels that
   security must be provided, it is better to put a testamentary trust into effect.

   Single will
   A single document incorporating the instructions (will) of one person which deals with the
   disposal of his/her estate at the death of him/her.

   Survivor
   A person surviving another.

   Testamentary writings
   A document containing your wishes (similar to that of a will).

   Testator
   A male person for whom a will is drawn up.

   Testatrix
   A female person for whom a will is drawn up.

   To realize
   To sell an asset.



US10394                    Pre Course Reading / Reference Material                    17
   To realize trust assets
   To sell an asset of a trust.

   Trust assets
   The capital and assets of a trust under the administration of trustees.

   Trust
   A legal entity created to protect the assets or money of another - usually minor heirs. A
   testamentary trust is created in a person's will, while an inter vivos trust is already
   created during his lifetime.

   Trustee
   A person or institution appointed to administer the assets in a trust (capital and income)
   for the benefit of the beneficiary until termination of the trust.

   Unmarried
   A person that is currently not married.

   Wife
   The woman to whom a man is married.

   Will
   A legal document in which is recorded the free and independent wishes of the
   testator/testatrix in respect of the distribution of the assets in his estate.

   With Security
   Where a cash amount or movable property due to a minor or unborn child is subject to a
   usufruct or fiduciary right, security will be required except when explicitly stipulated,
   otherwise in the will. The law does not lay down any stipulations regarding the nature of
   the security and the Master normally requires a deed of suretyship or a mortgage bond. It
   regularly happens that wills do not contain stipulat ions in this regard and that security is
   then required but cannot be provided. If the will does not contain stipulations that it is not
   necessary to provide security, it is normally a mistake. If the legator however feels that
   security must be provided, it is better to put a testamentary trust into effect.

   Witness
   A witness to a will must be at least 14 years of age and must be competent to testify in a
   court of law. The testator must sign the will in the presence of the two witnesses or
   acknowledge in their presence that the signature is his. It is not necessary for the
   witnesses to know that the document that is signed is a will. They merely acknowledge
   that the signature is that of the testator and that at the time of the signing he was of
   sound mind and not acting under duress.




   Annuities

   Compulsory annuity
   When you reach retirement you are compelled by law to use the returns from your
   defined contribution pension fund or retirement annuity policy to purchase what is known
   as a compulsory annuity from a life assurer. This is your pension.

   Voluntary annuity
   Should you be a member of a defined contribution provident fund you will receive your


US10394                     Pre Course Reading / Reference Material                   18
   retirement benefits as a cash lump sum. You are in this case not compelled to purchase
   a pension although it is an option to seriously consider. This pension is referred to as a
   voluntary annuity.

   Different types of annuities (pensions)

   A joint-life annuity
   A joint-life annuity provides a pension that will continue until the last survivor in a
   marriage dies. It offers the option of a reduced pension after the death of the first
   assured, which means that the original pension will be larger and may be a good option if
   both partners have made retirement provision. A joint-life pension also comes with an
   optional term guarantee, which will pay out the pension until the end of a specified term.

   Single-life annuity without a guaranteed term
   The single-life annuity without a guaranteed term is a very simple and straight forward
   pension option. After purchasing the pension you will receive a regular pension until the
   day you die when the pension will stop. You are therefore assured of a pension for life,
   however, if you die soon after retiring, your next of kin will not benefit from your
   retirement savings.

   Single-life annuity with a guaranteed term
   The single-life annuity with a guaranteed term pays a pension for a specified guaranteed
   term. Should you die before the end of the term the pension continues to be paid out to
   your dependents or nominees until the end of the term. Ten years is the guaranteed term
   used most often.

   Annuity with growth
   This annuity, as the name implies, offers a pension that grows by a fixed percentage
   each year. When purchasing this pension you will start with a smaller pension as
   opposed to, for instance, a single-life annuity without a guaranteed term, but it will
   increase steadily, thereby assisting in protecting one's income against inflation. The
   percentage increase is decided beforehand.

   Investment linked life annuity
   An investment linked life annuity is to the advantage of people who want to build capital
   rather than wanting to draw a monthly pension. Investment linked life annuities invest in
   unit trusts and the monthly pension and capital growth is dependent on the investment
   returns of the underlying portfolio, which implies certain risks.

   An investment linked life annuity preserves your capital by linking the pension to a
   combination of unit trusts. It is fully market related and the pension will vary, since you
   may decide annually on the amount you want to draw - between 5% and 20% - from your
   capital. Its biggest drawback is the risk of capital erosion, for example when choosing an
   income of 15% while the returns realised is only 12%.

   Pension with capital repayment
   Not all assurance companies offer this annuity. This is a unique investment product in
   that it retains your capital while paying out a pension. A pension with capital repayment
   allows you to invest your retirement fund money and draw a lifelong monthly pension,
   while at the same time the full amount of your investment is preserved for your next of
   kin.




US10394                   Pre Course Reading / Reference Material                   19
2     Section 2: Additional Notes to the Unit Standard Learning Material

Introduction
The Pension Fund Act (24 of 1956) is the statute that provides for the registration,
incorporation, regulation, and dissolution of pension, provident and retirement annuity funds.
The term pension fund in the Pension Funds Act is defined to include all three types of funds
mentioned above, with similar registration requirements and controls.

It is, however, in the Income Tax Act that a distinction is drawn between the different types of
funds. As strange as this may seem, this is a function of the dual approval system that
operates. In addition to the rules of a fund being approved by the Registrar of Pension
Funds, the rules have to be further approved by the Commissioner for Inland Revenue, if the
fund and the members thereof are to qualify for the tax relief available to them in the Income
Tax Act. Section 1 of the Income Tax Act consequently contains separate definitions of
pension fund, provident fund, and retirement annuity fund.

Pension fund” means—

A superannuating, pension, provident or dependants‘ fund or pension scheme established by law or any such fund established fo r the
benefit of the employees of any local authority
;

[Para. (a) Substituted by s. 2 (c) of Act No. 21 of 1995.]
With effect from a date determined by the Commissioner in relation to any fund hereinafter referred to (not being a date earl ier than 4
December 1981), any pension fund established for the benefit of employees of a control board as defined in section 1 of the Marketing of
Agricultural Products Act, 1996 (Act No. 47 of 1996), or for the benefit of employees of the Development Bank of Southern Afr ica, if the
Commissioner is satisfied that the rules of such fund are in all material respects identical to those of the Government Emplo yees'
Pension Fund; or;


[Para. (b) Substituted by s. 2 (1) (c) of Act No. 96 of 1985]
The Municipal Councilors Pension Fund provisionally registered under the Pension Funds Act, 1956 (Act No. 24 of 1956), on 23 May
1988, or any fund (other than a retirement annuity fund or a fund contemplated in paragraph (a) or (b)) which is approved by the
Commissioner in respect of the year of assessment in question and, in the case of any such fund established on or after 1 July 1986, is
registered under the provisions of the said Act: Provided that the Commissioner may approve a fund subject to such limitation s or
conditions as he may determine, and shall not approve a fund in respect of any year of asse ssment unless he is in respect of that year of
assessment satisfied—

That the fund is a permanent fund bona fide established for providing annuities for employees on retirement from employment or for the
dependants or nominees of deceased employees, or mainly for the said purpose and for the purpose
Of providing benefits other than annuities for the persons aforesaid; and


[Para. (i) Substituted by s. 2 (d) of Act No. 21 of 1995.]

That the rules of the fund provide—
(Aa) that all annual contributions of a recurrent nature to the fund shall be in accordance with specified scales;

(bb) that membership of the fund throughout the period of employment shall be a condition of the emplo yment by the employer of all
persons of the class or classe s specified therein who enter his employment on or after the date upon which the fund comes int o
operation;

(cc) that persons who immediately prior to the said date were employed by the employer and who on the said date fall within the said
class or classe s may, on application made within a period of not more than 12 months as from the said date, be permitted to become
members of the fund on such conditions as may be specified in the rules;

(Did) that not more than one-third of the total value of the annuity or annuities to which any employee becomes entitled, may be
commuted for a single payment, except where the annual amount of such annuity or annuities does not exceed R1 800 or such oth er
amount as the Minister of Finance may from time to time fix by notice in the Gazette;
[Sub-Para. (Did) substituted by s. 2 (1) (b) of Act No. 101 of 1990 and amended by s. 2 (1) (i) of Act No. 113 of 1993.]

(Ee) for the administration of the fund in such a man ner as to preclude the employer from controlling the management or assets of the
fund and from deriving any monetary advantage from moneys paid into or out of the fund, except that where the employer is a
partnership, a member of the partnership may be permitted to derive such monetary advantage if he was previously an employee and,
on becoming a partner, was permitted to retain his membership of the fund as though he had not ceased to be an employee, his
contributions being based upon his pensionable emolu ments during the 12 months which ended on the day on which he ceased to be an
employee and his benefits from the fund being calculated accordingly;

(Ff) that the Commissioner shall be notified of all amendments of the rules; and




US10394                                  Pre Course Reading / Reference Material                                           20
(Gg) that no portion of any annuity payable to the dependant or nominee of a deceased member shall be commuted later than six
months from the date of the death of such member; an


[Sub-para. (Gg) substituted by s. 2 (e) of Act No. 21 of 1995.]
That the rules of the fund have been complied with;


[Definition of ―pension fund‖ amended by s. 3 (i) of Act No. 90 of 1962, by s. 4 (1) (c) of Act No. 90 of 1972, by s. 3 (1) ( c) of Act No. 101
of 1978, by s. 3 (1) (c) of Act No. 104 of 1979 and by s. 3 (1) (c) of Act No. 91 of 1982 and substituted by s. 2 (1) (e) of Act No. 94 of
1983. Para. (c) Amended by s. 2 (1) (c) of Act No. 65 of 1986 and by s. 1 (1) of Act No. 99 of 1988.]

“Provident fund” means any fund (other than a pension fund, benefit fund or retirement annuity fund) which i s approved by the
Commissioner in respect of the year of assessment in question and, in the case of any such fund established on or after 1 Jul y 1986, is
registered under the provisions of the Pension Funds Act, 1956 (Act No. 24 of 1956): Provided that the Commissioner may approve a
fund subject to such limitations or conditions as he may determine, and shall not approve a fund in respect of any year of assessment
unless he is in respect of that year of asse ssment satisfied —

That the fund is a permanent fund bona fide established solely for the purpose of providing benefits for employees on retirement from
employment or solely for the purpose of providing benefits for the dependants or nominees of deceased employees or deceased former
employees or solely for a combination of such purposes; and

[Para. (a) Substituted by s. 2 (f) of Act No. 21 of 1995.]
That the rules of the fund contain provisions similar in all respects to those required to be contained in the rules of a pen sion fund in
terms of subparagraphs (aa), (bb), (cc), (ee) and (ff) of paragraph (ii) of the proviso to paragraph (c) of the definition of
“pension fund‖; and

[Para. (b) Substituted by s. 2 (1) (f) of Act No. 94 of 1983.]
That the rules of the fund have been complied with;

[Definition of ―provident fund‖ amended by s. 2 (1) (d) of Act No. 65 of 1986.]

“Retirement annuity fund” means any fund (other than a pension fund, provident fund or benefit fund) which is approved by the
Commissioner in respect of the year of assessment in question and, in the case of any such fund established on or after 1 July 1986, is
registered under the provisions of the Pension Funds Act, 1956 (Act No. 24 of 1956): Provided that the Commissioner may appro ve a
fund subject to such limitations or conditions as he may determine, and shall not approve any fund in respect of any year of asse ssment
unless he is in respect of that year of asse ssment satisfied —

That the fund is a permanent fund bona fide established for the sole purpose of providing life annuities for the members of the fund or
annuities for the dependants or nominees of deceased members; and

[Para. (a) Substituted by s. 2 (g) of Act No. 21 of 1995.]
That the rules of the fund provide—

For contributions by the members, including contributions made by way of transfer of members‘ interests in approved pension funds,
provident funds or other retirement annuity funds;

[Sub-para. (i) Amended by s. 4 (d) of Act No. 90 of 1964 and substituted by s. 2 of Act No. 96 of 1981.]

That not more than one-third of the total value of any annuities to which any person becomes entitled, may be commuted for a single
payment, except where the annual amount of such annuities does not exceed R1 800 or such other amount as the Minister of Finance
may from time to time fix by notice in the Gazette;

[Sub-para. (ii) Substituted by s. 4 (1) (e) of Act No. 90 of 1972, amended by s. 3 (1) (d) of Act No. 91 of 1982, substituted by s. 2 (1) (d)
of Act No. 101 of 1990 and amended by s. 2 (1) (k) of Act No. 113 of 1993.]

That no portion of any annuity payable to the dependant or nominee of a deceased member may be commuted later than six months
from the date of the death of such member;

[Sub-para. (iii) Substituted by s. 2 (h) of Act No. 21 of 1995.]

Adequate security to safeguard the interests of persons who may become entitled to annuities;

That no member shall become entitled to the payment of any annuity after he reaches the age of seventy years or, except in th e case of
a member who becomes permanently incapable through infirmity of mind or body of carrying on his occupation, before he
Reaches the age of fifty-five years;

That where a member dies before he becomes entitled to the payment of an annuity, the benefits shall not exceed a refund to his estate
or to his dependants or nominees of the sum of the amounts (with or without reasonable interest thereon) contributed by him and an
annuity or annuities to his dependants or nominees;

[Sub-para. (vi) Substituted by s 2 (i) of Act No. 21 of 1995.]

That where a member dies after he has become entitled to an annuity no further benefit shall be payable other than an annuity or
Annuities to his dependants or nominees;

[Sub-para. (vii) Substituted by s. 2 (i) of Act No. 21 of 1995.]

[Sub-para. (viii) Substituted by s. 6 (1) (g) of Act No. 89 of 1969 and deleted by s. 4 (a) of Act No. 103 of 1976.]




US10394                                   Pre Course Reading / Reference Material                                                21
[Sub-para. (ix) Substituted by s. 6 (1) (g) of Act No. 89 of 1969 and deleted by s. 4 (a) of Act No. 103 of 1976.]
That a member who discontinues his contributions prematurely shall be entitled either to an annuity (payable from the date on which he
would have become entitled to the payment of an annuity if he had continued his contributions) determined in relation to his actual
contributions or to be reinstated as a full member under conditions prescribed in the rules of the fund;

That upon the winding up of the fund a member‘s interest therein must either be used to purchase a policy of insurance which the
Commissioner is satisfied provides benefits similar to those pro vided by such fund or be paid for the member‘s benefit into another
approved retirement annuity fund;

That save-

(aa) as is contemplated in sub-paragraph (ii), or
(bb) for the transfer of any member‘s total interest in any approved retirement annuity fund into another approved retirement annuity fund
prior to the member becoming entitled to the payment of an annuity

no member‘s rights to benefits shall be capable of surrender, commutation or assignment or of being pledged as security for a ny loan;
That the Commissioner shall be notified of all amendments of the rules; and
That the rules of the fund have been complied with;
[Definition of ―retirement annuity fund‖ amended by s. 2 (1) (e) of Act No. 65 of 1986.]




Registration
Every fund has to apply to the Registrar of Pension Funds for registration. The registrar is an
employee of the Financial Services Board and is responsible for the administration of the Act
in terms of the powers granted to him. (Section 3). If the Registrar is satisfied
That:

         The registration of the fund is desirable and in the public interest, and
         The rules of the fund are not inconsistent with the Act and are based on sound
          financial principles, and
         The fund has complied with such requirements as he may have prescribed.
         He shall register the fund and issue a certificate of registration. [Section 4(3) and (4)].



Investment of Funds
Previously, terms of section 19 of the Act, a fund is required to invest in certain prescribed
assets. For a long time this was set at 53% of the aggregate value of all the assets of the
fund. Prescribed assets comprised, inter alia, cash, Eskom stock, RSA bills and bonds, etc.

This requirement was amended in 1989 and the prescribed investments are currently as
follows

     1. Part 1 assets: 100%
        Investment limit per institution (e.g. Eskom, SATS, etc.): 20%
     2. Fixed property: 30%
        Investment limit per one property: 5%                                                                Always refer to
     3. Shares (listed or unlisted): 75%                                                                     Regulation 28 when
        Investment limit per one company: 15%                                                                referring to this
     4. Mortgage bonds: 25%                                                                                  section.
        Investment limit per one property: 5%
     5. Combined limit for numbers 2, 3 and 4 above: 90%
        (i.e., a 10% minimum would have to go into Part 1 assets)

In terms of Regulation 28, now currently in use, there is no prescription of investment in
Assets.




US10394                                Pre Course Reading / Reference Material                                              22
Loans
A registered fund may, if its rules so permit, grant a loan to a member, in terms of section 19,
to enable him to;

         Purchase a dwelling, or
         Purchase land and erect a dwelling, or
         To make additions or alterations to, or to maintain or repair, a dwelling which belongs
          to the member or his spouse.

In all cases the loan will not be granted unless;

         It is secured by a first mortgage bond on the immovable property or a pledge of the
          member's fund benefits or both, and
         The dwelling is occupied by the member or a dependent of the member, and
         The rate of interest charged thereon is not less than that which may, from time to
          time, be prescribed by regulation, and
         The period of the loan does not exceed 30 years, and is redeemable in, at least,
          monthly installments, which include interest on the capital sum outstanding.



Protection From Creditors
The Act affords specific protection to fund benefits in certain circumstances, whilst at the
same time preventing the attachment of a member's benefit.

Section 37A prevents (except to the extent allowed in the Income Tax Act and Maintenance
Act) any fund benefit being reduced, transferred, ceded, pledged, or attached, or being
subject to any form of execution under a judgment or order of court. Any attempt to deal with
a benefit in this manner by a member, entitles the fund concerned to withhold or suspend
payment thereof.

Furthermore, if the estate of any person entitled to a benefit payable in terms of the rules of a
fund, is sequestrated, such benefit shall not be deemed to form part of the assets in the
insolvent estate of that person, and may not, in any way, be attached or appropriated by the
trustee or by the creditors of that insolvent estate. (Section 37B). An exception to this rule
relates to fund benefits pledged as security for a housing loan granted to the fund by the
member.

At the time of payment of a benefit by a fund, a deduction of amounts due to the fund from
that benefit will be allowed in the following circumstances
     In respect of a housing loan, or
     In respect of a guarantee, furnished to some other person on behalf of a member, in
        respect of a housing loan. [Section 37D (a)].

The fund may further deduct amounts due by a member to his employer on his retirement or
cessation of membership in respect of
    A housing loan granted by the employer to the member,
    A guarantee furnished by the employer to some other person in respect of a housing
       loan,
    Compensation for any damage caused to the employer because of any theft,



US10394                      Pre Course Reading / Reference Material                   23
          dishonesty, fraud, or misconduct, if the member has admitted liability in writing to the
          employer, or a judgment has been obtained against the member in any court.
          [Section 37D(b)].

At the request of a member or beneficiary, a fund may further deduct from any benefit
amounts due as
     Contributions to a medical aid fund,
     Premiums under policies of insurance (long-term and short-term),
     Any purpose approved by the registrar. [Section 37D(c)].



Payment of Death Benefits
In terms of section 37C, the benefit payable upon the death of the member must be dealt
with in a particular manner. This has the effect of restricting the member's right to validly
appoint a beneficiary of his choosing.

Critical to the application of this section is the definition of " dependant " in section 1. The
definition was amended in 1989 and became effective on 30 June 1989.

The following are defined as dependants:
    A person the member is legally liable to maintain.
    A person the member is not legally liable to maintain, if such person
           o Was in fact dependent on the member for maintenance at the time of the
               latter's death (in the opinion of the trustees of the fund).
           o Is the member's spouse (including customary unions of blacks and Asians)?
    A person the member would have become legally liable to maintain had he not died.

Because of this change, the member's children, their descendants, and spouses no longer
automatically qualify as dependants. The member's spouse does automatically qualify as a
dependant. This was not the case before the amendment.

If the member nominated a non-dependant beneficiary by means of nomination made after
30 June 1989, such nominee may benefit, even if there are dependants, in such proportions
as the person managing the business of the fund determines. Before the amendment,
nominees could only benefit in the absence of dependants.

These changes have resulted in death benefits being paid accordingly:
If there are dependants, then payment must be made in the proportions as determined by the
person managing the business of the fund.

If there are dependants in addition to a nominee, whose nomination was made after 30 June
1989, the person managing the business of the fund must make payment in the proportions
he considers equitable.

Nomination of non-dependant nominees made before 30 June 1989 will not be valid if
dependants survive the member.

If a nominee exists, but any dependants do not survive the member, the nominee will receive
the benefit twelve months after the member's death. Should the nominee only have been
designated to receive a portion of the benefit, the balance will be paid to the member's
estate.




US10394                      Pre Course Reading / Reference Material                    24
In the absence of dependants and nominees, the benefit will be paid to the member's estate
twelve months after the member's death.


Types of Pension Funds
Insured vs. Self Administe red Funds

Apart from "public sector" pension funds, all other funds would fall into two main categories:

         Self administe red funds, and insure d funds.
         Private Sector vs. Public Sector

A self-administered fund operates as an entity separate from the employer and is
administered by trustees. The trustees comprise representatives of both the employer and
employees in equal numbers. The trustees would consult actuaries, lawyers and portfolio
managers amongst others to assist them in the performance of their duties. Larger pension
funds may employ such people on a full time basis. The pension fund has an identity
separate from the employer, and effective control is in the hands of the trustees. This
represents a significant change from the past, where the employer effectively controlled the
affairs of the fund. The increased power of the unions and amendments to the Pension
Funds Act has changed the balance of power.

An insured pension fund also has legal personality and appointed trustees. The
administrative requirements of such trustees are; however, greatly circumscribed because
the only asset(s) the fund owns is a policy or policies of assurance issued by a life assurer.
Such policy or policies would secure the benefits payable by the fund to its members. The
underwriting life assurer largely performs the various administrative functions. The trustees
would nevertheless be responsible for appointing the institution to underwrite the risk
benefits, administer the fund and manage the investments. They would also be responsible
for the rules of the fund, making amendments as and when necessary.

Self administered funds often contract with life assurers in respect of certain specific matter,
e.g. the underwriting of group life cover, to provide portfolio management services to provide
administrative services, to purchase annuities, etc.


De fined Contribution vs. Defined Be nefit

In a defined contribution fund, or money purchase fund as it is also called, the retirement
benefit is based on the investment return achieved by the fund on the contributions paid by
the member and the employer. The investment risk is therefore that of the member.
By contrast, a defined benefit fund provides that the pension payable to a retiring member
shall be based on a percentage of the member‘s salary over the last 12 months (or longer) of
employment. The applicable percentage shall depend on the period of membership of the
fund. Usually, an additional percentage amount is provided for each completed year of
service.


Private Sector vs. Public Sector

The definition of "pension fund" in section 1 of the Act, distinguishes between two types of
fund. Those established for the benefit of the employees of central provincial and local
government, state and parastatal corporations, control boards and the Development Bank of
Southern Africa, on the one hand and any other fund (including the Municipal Councilors


US10394                    Pre Course Reading / Reference Material                    25
Pension Fund) on the other. Funds falling in the first category are included in paragraphs (a)
and (b) of the definition, whilst funds falling in the second category are included in paragraph
(c) of the definition. This distinction is important because the treatment of each category in
the Income Tax Act differs considerably. An important difference is that the pension funds
referred to in paragraph (c) are required to be approved by the Commissioner for Inland
Revenue.

This approval means that the deductible contributions to a pension fund by both the
employer and the employee are subject to certain limits. Similarly, the benefits paid by such
funds are subject to tax, although tax concessions are available.

Public sector funds on the other hand, are not subject to these restrictions. In theory, there is
no limit to the deductible contribution a member can make to such a fund. Similarly, lump
sum benefits are paid completely free of tax.

In March 1998, a government fund became the same as a private fund and in respect to
paragraphs (a) and (b) fund benefits prior to March 1998 were tax free. To date they are
subject to the 2nd Schedule of the ITA

Benefits
The rules of a pension fund must provide for the payment of annuity and lump sum benefits.

Annuities
The annuity benefits are usually paid monthly and may either be paid out of the pension
fund‘s cash flow or it can be paid through a contractual arrangement with a life assurer. In
the latter case, the pension fund would purchase an annuity on behalf of the member. The
obligation to make the payment then becomes that of the life assurer concerned.
In most cases, the member is given the option of selecting from a range of annuity options.
Some of those available include the following:

         A life annuity without guarantee

   A life annuity is payable throughout the lifetime of the annuitant and ceases on death
   whenever it may happen. Because there is no guarantee, the risk of early death falls on
   the annuitant. The annuity rate for such annuities will be higher than for the others
   mentioned below.

         A life annuity with guarantee

   A life annuity with guarantee will be paid for as long as the annuitant lives or the
   guaranteed period, which ever is the longer. The guarantee period can be anything from
   five years upwards. The longer the guarantee period, the lower the annuity rate. Upon the
   death of the annuitant within the guarantee period, the annuity will be paid to his or her
   nominated beneficiary.

         A joint life annuity

   A joint life annuity will continue until the death of the last dying annuitant. No payment of
   any kind is made after the second death. A joint life annuity may be issued in one of two
   ways. The annuity may continue to pay the same amount for as long as either annuitant
   survives or the annuity may reduced after the death of the first dying annuitant

         A linked annuity



US10394                          Pre Course Reading / Reference Material               26
   A linked annuity is one where the purchase price is invested in a portfolio of the
   annuitant‘s choosing. The annuitant may then select the level of income that he or she
   wishes to receive from the contract. This must be between 5% and 20% of the capital in
   the fund and may be changed on the anniversary of the contract.

         An insured annuity

   An insured annuity is one where he original purchase consideration is insured through a
   life policy. Upon the death of the annuitant, the original retirement capital is paid out free
   of tax to the annuitant‘s nominated beneficiaries. A life annuity will be purchased and a
   portion of the annuity will be used to pay the premiums under a life policy. The net
   payment to the annuitant is therefore reduced.


Lump Sums
The rules of the fund will allow the commutation of not more than one-third of the annuity
benefit and for this amount to be paid as a lump sum. The decision whether to commute or
not is that of the member. In the event of his death, his nominated beneficiary makes it. A
portion of this lump sum benefit may be free of tax. The amount in excess of the tax-free
portion will be taxed at the member‘s average rate of tax.


Income Tax Consequences
The definition of "pension fund" in section 1 of the Act, distinguishes between two types of
fund. Those established for the benefit of the employees of central provincial and local
government, state and parastatal corporations, control boards and the Development Bank of
Southern Africa, on the one hand and any other fund (including the Municipal Councilors
Pension Fund) on the other. Funds falling in the first category are included in paragraphs (a)
and (b) of the definition, whilst funds falling in the second category are included in paragraph
(c) of the definition. This distinction is important because the treatment of each category in
the Income Tax Act differs considerably. An important difference is that the pension funds
referred to in paragraph (c) are required to be approved by the Commissioner for Inland
Revenue.

The Commissioner may approve a fund subject to such limitations or conditions as he may
determine. He shall, however, not approve a fund unless he is satisfied that:
The fund is a permanent bona fide fund established for providing:
    Annuities for employees on retirement from employment, or
    Annuities for widows, children, dependants or nominees of deceased employees, or
    Benefits other than annuities for the aforesaid, provided the provision of annuities
       was the main purpose for which the fund was established, and
    The rules of the fund contain certain provisions, the most important of which are:
    That membership of the fund be a condition of employment in respect of the class or
       classes of employee specified therein, who enter employment after the date upon
       which the fund comes into operation,
    That employees who, immediately prior to the said date within the said classes, may,
       within a period of not more than twelve months, be permitted to become members of
       the fund,
    That not more than one-third of the annuity or annuities to which the employee
       becomes entitled, may be commuted for a lump sum payment, except where the
       annual amount of such annuity or annuities does not exceed R1800.
    That the employer is prohibited from controlling the assets or management of the


US10394                        Pre Course Reading / Reference Material                27
          fund and from deriving any monetary advantage from moneys paid into or out of the
          fund. An exception is made in the case of an employer that is a partnership. A
          partner, who was previously an employee of the partnership, is permitted to remain a
          member of the fund.

Approval by the Commissioner is very important. Only contributions paid to an approved fund
are deductible, and the tax relief afforded lump sum benefits is only available in respect of
those benefits paid by approved funds.

Income Tax Consequences

Investment Income

The receipts and accruals of any pension fund used to be exempt from tax. In addition, those
funds either wholly or partly administered by life assurers were not disadvantaged, since the
amounts derived by assurers from business carried on by them with pension funds was
excluded from assurers' taxable income. It is for this reason that these portfolios were
referred to as untaxed. The returns in untaxed portfolios compared to tax portfolios (which
housed life assurance business) were always slightly higher for this reason. This situation
changed in 1996 when the Taxation of Retirement Funds Act was passed. This Act provides
for the taxation of the investment income of a pension fund at the rate of 17%. Investment
income is defined as net rental and interest income.

The initial rate in the act was set at 17%.This is not subject to review and changes are being
made.

The exposure of a fund to this tax will depend on the type of portfolio the funds assets are
invested. If there is a significant property or cash holding, the tax liability will be greater than
for a fund, which is mainly invested in equities



Income Tax Consequences

Contributions

Employee
The maximum allowable deduction available to each person who contributes any sum, by
way of current contribution, to a pension fund, due to the holding of any off ice or
employment, shall not exceed the greater of
R1 750, or
7,5% of the remuneration derived by such person in respect of his retirement funding
employment. [Section 11(k)(i).]

Remuneration from retirement funding employment is defined in section 1 to mean, in the
case of an employee, any income derived from employment, in respect of which the
employee is a member, whether contributory or not, of a pension or provident fund
established for the benefit of employees of the employer, from whom such income is derived.
(Remuneration in this context means remuneration as defined in paragraph 1 of the Fourth
Schedule excluding sub-paragraph (iv) of that definition.)

In the case of the holder of any office (e.g. a director) it means any income derived by way of
salary, emoluments, fees or other remuneration, derived from the holding of such office in
respect of which he is a member, whether contributory or not, of a pension or provident fund



US10394                     Pre Course Reading / Reference Material                      28
established for the benefit of office holders or employees.

In the case of both employees and office holders, only that portion of the said income as is
taken into account in the determination of the contributions made by them, or on their behalf,
to such pension or provident fund will form part of their remuneration from retirement funding
employment. [Definition of retirement funding employment in section 1.]

Section 11(k)(i) allows a deduction in respect of contributions paid to a third class of person
besides an employee and office holder. This partner in a partnership was previously an
employee of the partnership and a member of a pension fund established by the partnership
for the benefit of employees. In cases like this, an exception is made to the general rule that
an employer may not derive any monetary advantage from the fund. [Definition of pension
fund in section 1.]

Such a person is allowed a deduction of the amount contributed to a pension fund by way of
current contributions subject to the stated limits. [ Section 11(k)(i). ] However, in this case,
remuneration from retirement funding employment means that part of his income from the
partnership, in the form of his share of profits, as does not exceed his pensionable
emoluments during the twelve months preceding the day he ceased to be an employee and
became a partner.

In addition to the deduction allowed in respect of current contributions, section 11(k)(ii)
allows the deduction of any sum paid in respect of any past period, which is to be reckoned
as pensionable service in terms of the rules governing the fund. This deduction is limited to
an amount not exceeding R1 800.

The limitations placed on the deduction allowed per person only apply in respect of
contributions to pension funds referred to in paragraph (c) of the pension fund definition ,
i.e. "private sector" funds. Contributions to the "public sector" funds referred to in paragraphs
(a) and (b) of that definition are deductible without limit.

As far as both current and arrear contributions are concerned, any contribution which has
been disallowed as a deduction, only because it exceeds the amount of the deduction
allowed, shall be carried forward and be deemed to be an amount paid in the next year of
assessment.

Employer
An employer's contributions to a pension fund for the benefit of an employee are de ductible.
[Section 11(1)] The maximum allowable deduction is limited to an amount not exceeding ten
per cent (10%) of the approved remuneration of such employee or such greater amount, as
the Commissioner considers reasonable. For the purposes "approved remuneration" means
the total remuneration accruing to the employee in respect of his employment by the
employer as the Commissioner considers fair and reasonable in relation to the services
rendered by the employee to the employer, taking into account any other benefits derived
from that employment.

It should be remembered that section 11(l) also covers contributions to provident and benefit
funds, in addition to pension funds. Where the employer contributes on behalf of an
employee to more than one of these funds, the aggregate contributions would be subject to
these limitations. In practice, the limit on the deduction is 20% of remuneration and not the
10% mentioned in the section.

As in the case of a member's contribution, a special exception is made to cater for a partner
who was previously an employee of the partnership and was permitted to remain a member
of the pension fund upon becoming a partner. The partnership's contributions on behalf of


US10394                    Pre Course Reading / Reference Material                     29
such a person will be deductible, subject to the prescribed limits.

In the event of an employer contributing a lump sum to a pension fund on behalf of an
employee, the Commissioner may determine that this amount be deducted in a series of
annual installments until the contribution is extinguished.


Income Tax Consequences
Benefits - Annuity
The benefits paid by way of a pension or an annuity as it is also called, are taxed as and
when these are received by or accrue to the taxpayer. These amounts form part of the
taxpayer‘s gross income in terms of paragraph (a) of that definition in section 1 and are
taxed at the marginal rate

Benefits - Lump Sum

Paragraph (e) of the definition of gross income provides for the inclusion in the gross
income of a taxpayer of any amount, determined in accordance with the provisions of the
Second Schedule in respect of a lump sum benefit from a pension, provident or retirement
annuity fund received by or accrued to the taxpayer who was a member of such a fund

(Applicable to Government Pensions only) Lump sum benefits from a fund referred to in
paragraph (a) or (b) of the definition of "pension fund " (i.e. public sector funds) are excluded
from the operation of this provision.

The purpose of the Second Schedule to the Income Tax Act is, to provide the means for
calculating the portion of a lump sum benefit to be included in the gross income of a taxpayer
in terms of paragraph (e) of that definition.

For the purposes of the Second Schedule the term "lump sum benefit" includes
Any amount determined by the commutation of an annuity or portion of an annuity, and
Any fixed or ascertainable amount payable by any pension, provident or retirement annuity
fund.

This definition is wide enough to cover not only the lump sums payable upon the retirement
or death of the member but also benefits payable upon resignation or the winding-up of a
fund as well.

The basis of the calculation of the amount to be included in gross income is two formulae.
Formula A is applicable to pension and provident funds but not to retirement annuity funds
and is stated as follows

Y = 15\1 x N\50 x 1\3 x average sala ry

This can be stated in a simpler form as                              Y = N\10 X 60 000
Y = N\10 x average salary,
Where
"Y"
Represents the amount to be determined;
" N"
Represents the number of completed years in the period of employment of the taxpayer,
which, in terms of the rules of the fund in question, is taken into account for determining the
amount of the benefits payable to him under the fund;
      If the period of employment is not taken into account for this purpose it shall



US10394                    Pre Course Reading / Reference Material                       30
          represent the number of completed years in the period of his membership of the fund
          and
         Shall not exceed 50;
         "Average salary"
         Means the highest annual average salary actually earned by the taxpayer during five
          consecutive years in service of the employer by whom he was employed during his
          membership of the fund and
         Shall not exceed R60 000.

The application of this formula is further qualified by the following provisos:
Where "N" as applied to one pension fund, includes a period of employment or membership
that is common to another pension or provident fund the common period may only be applied
to one of the funds.

The taxpayer who is a member of two or more such funds having a common period of
employment or membership has the option of applying that period to the fund of his
choosing. He must notify the Commissioner of his choice in writing before the submission of
the tax return in which such lump sums are included. Since the taxpayer's objective would be
to maximise "Y", he should apply the common period to the fund in respect of which the
average salary is the highest.

In the case of a member of a pension fund who was previously an employee of a partnership
and upon becoming a partner was entitled to retain his membership of the fund, the period of
employment shall include the period of membership whilst he was a partner and, for the
purposes of determining his "average salary" he during the period of membership whilst he
was a partner.

FORMULA B

The second formula, Formula B, is applicable to pension, provident and retirement annuity
funds and is stated as follows
Z=C =E - D
Where
"Z"
Represents the amount to be determined;
"C "
Represents the sum of the amounts calculated in formula A in respect of such funds of which
he is or was a member and from which lump sum benefits were or may be derived in
consequence of his death or retirement, and;

Represents, in the case of retirement annuity funds the aggregate of lump sum benefits
received by or accrued to him in the current, or any previous year of assessment;

Shall not exceed the greater of R120 000 or R4 500 multiplied by the number of completed
years during the whole of which the taxpayer concerned had been a member of one or more
pension, provident and retirement annuity funds, other than those funds from which he had
withdrawn, resigned or had been wound-up. This multiplication factor is, however, subject to
the following provisions [paragraph 5(6)]:
     In the case of a pension or provident fund, in terms of the rules of which, the benefits
         payable to members are determined in accordance with their period of employment,
         the period of membership shall be deemed to be his actual period of employment but
         including any period which, in terms of the rules, is required to be taken into account
         in determining the amount of such benefits;
     In the case of a retirement annuity fund, where a member had discontinued



US10394                     Pre Course Reading / Reference Material                  31
          contributions prematurely and had not been reinstated as a full member, he shall for
          these purposes be deemed not to have been a member of the fund during the period
          in respect of which contributions were not made.

"D" represents lump sum benefits from pension, provident or retirement annuity funds, which
have previously been, received tax free;

"E" represents the taxpayer's contributions to a pension, provident or retirement annuity fund
that were not allowed as a deduction.

The calculation of the amount to be included in respect of lump sum benefits upon retirement
death and withdrawal will be dealt with in turn.

Benefits - Upon Retirement

At the outset, it should be remembered that the effect of the Second Schedule is to require
the calculation to be performed every time a member retires from a fund. Furthermore, one is
required to take into account those funds from which the member has retired in the past and
those funds of which he is still a member, with the exception in the latter case, of retirement
annuity funds of which the taxpayer is still a member. It is, therefore, not possible, in cases
where a taxpayer is or has been a member of more than one fund, to perform the calculation
in isolation in respect of only the fund from which he is retiring.

The word "retire" is also defined for the purposes of the Second Schedule . In the case of a
pension, fund it means to retire from employment and become entitled to the payment of an
annuity from such fund. For a provident fund, it means to retire from employment and
become entitled to the payment of full benefits in terms of the rules of the fund. Finally, in the
case of a retirement annuity fund it means to become entitled to the payment of an annuity
from such fund.

Membership of more than one fund

Membership of more than one fund requires the calculation to be performed taking into
account all other funds past and present. The Second Schedule lays down the rules that
govern the situation. These are
    Where an amount has to be determined in accordance with formula A in respect of
       any pension or provident fund of which the taxpayer is still a member, it shall be
       assumed for the purposes of the calculation that
    The taxpayer will survive the date of his retirement from the fund, and
    Until that date, he will continue to be employed at the same salary scale at which he
       is employed at the date of the calculation. [Paragraph 5(3) .]
    No regard need be had of any retirement annuity fund of which the taxpayer is still a
       member at the time of the calculation. [Paragraph 5(4).]

The Ave rage Rate

Having calculated the amount, if any, to be included in the gross income of a taxpayer in
respect of lump sum benefits derived from funds, it now remains to examine how such
amounts will be taxed. Paragraph 7 provides that any amount determined in accordance with
the Second Schedule that is included in the gross income of any person shall be taxed at the
taxpayer's average rate of tax as determined in terms of section 5(10). The formula
contained in this section is known as the rating formula. The method of determining the
average rate was changed with effect from 1 September 1995. The new formula is applicable
to all lump sum benefits that accrue on or after this date. The method applied requires the



US10394                      Pre Course Reading / Reference Material                   32
calculation of the taxpayer‘s average rate of tax in the year of retirement by dividing the
amount of tax payable on the taxpayer's "normal" taxable income before rebates by his
"normal" taxable income. "Normal" taxable income excludes the taxable portion of any lump
sum benefits. This amount is then compared with the taxpayer‘s average rate in the
preceding year of assessment. The higher of these two rates is the rate that will be applied to
the taxable portion of the lump sum benefit.

One of the major changes brought about by the 1995 amendment was the exclusion of the
taxable portion of any lump sum benefits form the taxable income figure used in calculating
the maximum deduction allowed in respect of certain categories of deduction. Deductions
affected are those, which may not exceed a percentage of taxable income. This includes
contributions to a retirement annuity fund [section 11(n)]. Whereas the taxable portion of
lump sum benefits could previously have been used in calculating the allowable deduction in
respect of contributions to a retirement annuity fund, this cannot now be done when
calculating the average rate of tax. This change is best illustrated by way of an example.

Average rate of Tax

Mr. Smith retired on 1 November 1995. His income for the year ending 29 February 1996 is
as follows
Salary (Taxable) R80 000
Interest (Taxable) R 4 000
Pension R15 000

Total taxable income (Normal) R99 000
In addition, Mr. Smith received a lump sum of R350 000 of which R90 000 was tax-free.
In determining his average rate of tax, Mr. Smith must calculate the tax payable on his
taxable income of R99 000. Mr. Smith may reduce his taxable income by contributing to a
retirement annuity fund. Before 1 September 1995, this deduction would have been the
greater of:

               A 15% of his income from non retirement-funding employment
                 i.e. 15%[R4 000+R15 000+(R350 000-R90 000)]=R41 850
                                              Or
                            R3 500-(current pension contributions)
                         i.e. let us assume this results in a nil figure
                                              Or
                                           R1 750
                   Therefore Mr. Smith‘s revised taxable income would be:

               Income                 R99 000
               Less: R A contribution R41 850
               New taxable income R57 150

This would have resulted in a lower average rate of tax being applied to the taxable portion of
the lump sum.

After 1 September 1995, the calculation in an above will exclude the taxable portion of the
lump sum benefit. Mr. Smith‘s maximum, deductible contribution to a retirement annuity fund
will be:
15%(R4 000+R15 000)=R2 850

His revised taxable income will now be:



US10394                    Pre Course Reading / Reference Material                   33
          Income                 R99 000
          Less: R A contribution R 2 850
          New taxable income R96 150

This will result in a higher average rate of tax being applied to the taxable portion of the lump
sum. It should be remembered that it would first be necessary to calculate his average rate of
tax in the previous year of assessment and use the higher of that rate and the rate
determined above in calculating the tax payable on the lump sum.

Benefits - Upon Death

Membership of more than one fund

There is no limitation placed upon the lump sum benefit that may be paid by a pension fund
upon the death of a member provided of course that not more than one-third of the annuity or
annuities that become payable are commuted. Additional death benefits in the form of group
life cover are common features in most pension funds and very often form the bulk of the
lump sum benefits payable upon death.

Any lump sum benefit payable upon the death of a member of a pension fund is deemed to
have accrued to the member the day before his death. Subsequently, such amounts shall be
taxed, subject to the relief mentioned below, in the hands of the deceased member and not
in his estate. It is, however, if the tax so paid may be recovered from the person to whom or
in whose favour the lump sum accrues.

The calculation of the amount to be included in the gross income of a deceased member is
the same as that upon retirement, except for the introduction of a minimum amount for C. In
the event of death before retirement, C shall not be less than the greater of
R60 000, or

An amount equal to twice the salary actually earned by the member during the twelve
months ending at his death, as does not exceed R60 000.

The maximum limit for C remains as it is in the case of retirement at the greater of
R120 000

Or

R4 500 x the number of years completed membership of all retirement funds.

Should a person die before his retirement, whilst he is a member of more than one fund, the
calculation of the amount any lump sum benefit to be included in his gross income will be
similar to the calculation used in the event of retirement. The only differences relate to the
change parameters for item C in formula B.

Benefits - Upon Withdrawal
The benefit accruing upon the withdrawal of a member from a pension is paid by way of a
lump sum. No annuity benefits arise in this instance.

The general rule is that the withdrawal benefit will be included in the gross income of the
withdrawing member upon receipt or accrual but for the first R1 800 thereof which will
consequently be received free of tax. The amount so included in gross income qualifies to be
taxed at the member's average rate in terms of the rating formula. [Paragraph 6(d) read with
paragraph 7.] An exception to this rule relates to instances where an amount equivalent to


US10394                     Pre Course Reading / Reference Material                    34
the withdrawal benefit is transferred from one fund to another e.g. a preservation fund.

If a member withdraws from a pension fund, so much of any lump sum benefit paid into any
approved pension or retirement annuity fund, for the benefit of the member, will not be
included in his gross income . [Paragraph 6(a).] This "exemption" would, however, not apply
to the transfer of a lump sum from a pension fund to a provident fund. In such a case, the
amount equivalent to the member‘s withdrawal benefit from the fund, less R1 800 would be
included in the member's gross income , notwithstanding the fact that this amount was
transferred to the provident fund. This is often referred to as the member‘s contributions plus
interest. It should however be remembered that depending on the rules of the fund, this
amount could be significantly greater than the member‘s contributions plus interest. The
balance of the member‘s share of the fund can be transferred free of tax. The proviso to
paragraph 6 places a minimum on the tax-free portion of a withdrawal benefit. It shall not be
less than an amount equal to the member's own contributions to the fund in question which
were not deductible.

It is important to note that the R1 800 "exemption" is available in each year of assessment
and is not an "once-in-a-lifetime" concession. The benefits payable upon the winding-up of a
fund are treated in exactly the same manner as withdrawal benefits.

The tax free amount on the withdrawal is the greater of;
    R1800 plus the amount transferred to the fund or
    Amount of premiums or contributions, which were not allowed to be deducted.



Retirement Fund Annuities

Introduction
A retirement annuity fund is often described as the individual's personal and portable pension
fund. Largely the two types of funds are very similar, with the principle difference being the
absence of an employer\employee relationship in the case of a retirement annuity fund.

A retirement annuity fund is established in terms of the Pensions Fund Act and is subject to
the supervision of the Registrar of Pension Funds who in turn falls under the authority of the
Financial Services Board. An individual joins a retirement annuity fund by signing the
relevant application form. Contributions to a retirement annuity fund may usually be made at
a rate chosen by the member, although most funds do impose a minimum level of
contribution. The frequency of contributions is usually also flexible and may even consist of a
single lump sum. Unlike the rules relating to premium variations under life policies, no legal
controls are applicable to the payment of contributions to a retirement fund, consequently,
contributions may be increased or reduced or even stopped without there being any adverse
tax consequence to the member.

A member may retire from a retirement annuity fund at any time between the ages of fifty-five
and seventy (both male and female). No benefit may be paid to a member or his dependants
prior thereto, except in the case of death or disability. Retirement annuity benefits may not be
ceded or encumbered in any way, and, consequently, cannot be used as collateral security.
(Section 37A)

Contributions received by the fund are invested by the trustees in the equity, property, gilt,
and money markets, in compliance with the prudent investment guidelines laid down by the
Financial Services Board.



US10394                    Pre Course Reading / Reference Material                    35
A member may choose whether he wishes to have life and\or disability cover included in the
benefits payable. If such options are selected, it will result in a larger amount being available
to fund the benefits to the member or his dependants in the event of his death or disability.

The only benefit payable by a retirement annuity fund to a member or his dependants is an
annuity. However, not more than one-third of the total value of the annuities to which a
person becomes entitled to receive from the fund may be commuted to a lump sum. There is
one exception to this rule. Where the annual amount of such annuity or annuities does not
exceed R1800, the entire benefit may be paid as a lump sum.

The deductibility of contributions to a retirement annuity fund effectively reduces the net cost
of contributions to the member, since a portion of each contribution is funded by the
consequent tax saving. The higher the member's marginal rate of tax, the lower the
percentage net cost he bears.

Benefits
The rules of a retirement annuity fund must provide for the payment of annuity and lump sum
benefits.

Annuities

The annuity benefits are usually paid monthly and will be paid through a contractual
arrangement with a life assurer. The retirement annuity fund will purchase an annuity on
behalf of the member. The obligation to make the payment then becomes that of the life
assurer concerned in terms of the annuity contract.

In most cases, the member is given the choice of selecting from a range of annuity options.
Funds that allow the member this choice are called "untied funds". Some of options available
are:

A life annuity without guarantee

A life annuity is payable throughout the lifetime of the annuitant and ceases on death
whenever it may happen. Because there is no guarantee, the risk of early death falls on the
annuitant. The annuity rate for such annuities will be higher than for the others mentioned
below.

A life annuity with guarantee

A life annuity with guarantee will be paid for as long as the annuitant lives or the guaranteed
period, which ever is the longer. The guarantee period can be anything from five years
upwards. The longer the guarantee period, the lower the annuity rate. Upon the death of the
annuitant within the guarantee period, the annuity will be paid to his or her nominated
beneficiary.

A joint life annuity

A joint life annuity will continue until the death of the last dying annuitant. No payment of any
kind is made after the second death. A joint life annuity may be issued in one of two ways.
The annuity may continue to pay the same amount for as long as either annuitant survives or
the annuity may reduced after the death of the first dying annuitant

A linke d annuity



US10394                    Pre Course Reading / Reference Material                     36
A linked annuity is one where the purchase price is invested in a portfolio of the annuitant‘s
choosing. The annuitant may then select the level of income that he or she wishes to receive
from the contract. This must be between 5% and 20% of the capital in the fund and may be
changed on the anniversary of the contract.

An insured annuity

An insured annuity is one where the original purchase consideration is insured through a life
policy. Upon the death of the annuitant, the original retirement capital is paid out free of tax to
the annuitant‘s nominated beneficiaries. A life annuity will be purchased and a portion of the
annuity will be used to pay the premiums under a life policy. The net payment to the
annuitant is therefore reduced.

Lump Sums

The rules of the fund will allow the commutation of not more than one-third of the annuity
benefit and for this amount to be paid as a lump sum. The decision whether to commute or
not is that of the member. In the event of his death, his nominated beneficiary makes it. A
portion of this lump sum benefit may be free of tax. The amount in excess of the tax-free
portion will be taxed at the member‘s average rate of tax.

Income Tax Consequences

Approval

A retirement annuity fund is defined as a fund, other than a pension, provident or benefit
fund, which is approved by the Commissioner and, if established after 01 July 1986, is
registered under the provisions of the Pension Funds Act.

The Commissioner may approve a fund subject to certain limitations or conditions that he
may prescribe. He shall not, however, approve a fund unless he is satisfied,
That the fund is a permanent fund, bona fide established for the sole purpose of providing,
    Life annuities for the members of the fund, or
    Annuities for the widows, dependants or nominees of the deceased members, and
    That the rules of the fund contain certain provisions.
    Amongst the most important of these are,
           o Not more than one-third of the total value of the annuities, to which any
               person becomes entitled, may be commuted to a lump sum, except where the
               annual amount of such annuities does not exceed R1800.
           o Members have to retire from the fund prior to reaching the age of seventy, but
               may not retire before reaching the age of fifty-five, unless the member,
               through infirmity of mind or body, becomes incapable of carrying on his
               occupation.
           o Upon the death of a member prior to retirement from the fund, the lump sum
               benefit payable to his widow, children, dependants, nominees or to his estate,
               shall not exceed a refund of contributions, with or without reasonable interest
               thereon, and an annuity or annuities to his widow, children, dependants or
               nominees.
           o Members who prematurely discontinue contributions may be reinstated as full
               members under conditions prescribed in the rules.
           o With the exception of the commutation provisions above, no member's rights
               to benefits shall be commuted, surrendered, assigned or pledged as security
               for any loan.


US10394                     Pre Course Reading / Reference Material                     37
Investment Income

The receipts and accruals of any retirement annuity fund used to be exempt from tax. As in
the case of pension and provident funds, this changed with the passing of the Taxation of
Retirement Funds Act in 1996. This Act provides for the taxation of the investment income of
a retirement annuity fund at the rate of 17%. Investment income is defined as net rental and
interest income.


The rate of 17% is reassessed from time to time and is typically announced each year tin the
Minister of Finance‘s budget speech. Please make sure that you know what the correct rate
is.




The exposure of a fund to this tax will depend on the type of portfolio the funds assets are
invested in. If there is a significant property or cash holding, the tax liability will be greater
than for a fund, which is mainly invested in equities.

Contributions

Section 11(n) allows the deduction of contributions made by any person as a member of a
retirement annuity fund. The maximum allowable deduction in respect of such contributions
is the greatest of,
      A 15% of the taxpayer's income, other than income from retirement funding
        employment, after admissible deductions, but excluding the following deductions,
            o Section 17A - expenditure incurred by a lessor of land let for farming
                purposes, in respect of soil erosion works,
            o Section 18 - medical and dental expenses,
            o Section 18A - donations to universities, colleges and certain education funds,
            o Paragraphs 12(1)(c) to (j) of the First Schedule - certain capital expenditure
                incurred in the carrying on of a bona fide farming operation
      B the difference, if any, between R3 500 and the taxpayer's allowable current
        contributions to a pension fund
      C an amount of R1 750.

The nature of the income excluded under item an above is that which would constitute
remuneration from retirement funding employment as defined in section 1. In the case of an
employee, this means any income derived from employment, in respect of which the
employee is a member, whether contributory or not, of a pension or provident fund
established for the benefit of employees of the employer, from whom such income is derived.
Remuneration in this context means "remuneration" as defined in paragraph 1 of the Fourth
Schedule, excluding sub-paragraph (iv) of that definition.

In the case of the holder of any office (for example, a director) it means any income derived
by way of salary, emoluments, fees or other remuneration derived from the holding of such
office, in respect of which he is a member, whether contributory or not, of a pension or
provident fund established for the benefit of office holders or employees.

In the case of both employees and office holders, only that portion of the said income as is
taken into account in the determination of the contributions made by them, or on their behalf,



US10394                     Pre Course Reading / Reference Material                    38
to such pension or provident fund will form part of their remuneration from retirement funding
employment. [Definition of retirement funding employment in section 1.]

This deduction is, however, subject to the following provisos,
     No deduction will be allowed in cases where the amount contributed is a lump sum
       benefit derived from a pension, provident or retirement annuity fund, and which is not
       included in the member's gross income by virtue of paragraph 6 (a), (b) or (c) of the
       Second Schedule. This paragraph provides that amounts derived from these funds
       upon withdrawal or resignation from the fund or upon the winding-up of the fund, and
       which is paid into a retirement annuity fund for the benefit of a taxpayer, will not be
       included in his income. The purpose of this proviso, therefore, is to prevent a double
       deduction. In other words, if a member chooses to preserve his pension or provident
       fund benefit using a retirement annuity fund, the transfer of that benefit to the
       retirement annuity fund will not result in a tax deduction for the member.
     The deduction in respect of contributions to a retirement annuity fund may not exceed
       the taxable income of the taxpayer before the deductions allowed under section 17A
       and paragraphs 12(1)(c) to (j) of the First Schedule. In other words, the deduction will
       not be allowed to create an assessed loss.
     Contributions to a retirement annuity fund that do not qualify for deduction may be
       carried forward and will be deemed to be current contributions to the fund or funds in
       the succeeding period of assessment. This allows the taxpayer the facility of "rolling
       over" disallowed contributions into future periods of assessment, until the entire
       contribution has been deducted.

This "roll over" facility will, however, not be available to the extent that such disallowed
contributions have been taken into account in formula B of the Second Schedule, to increase
the tax-free portion of a lump sum benefit .

A further deduction allowed in terms of section 11(n) concerns contributions made in order
for a member, who has prematurely discontinued contributions, to be reinstated as a full
member. The allowable deduction is R1 800 per annum. The rules of the fund must, in fact,
provide for reinstatement and the member‘s current contributions to the fund must be paid in
full.

Although this deduction appears similar to that allowed in respect of arrear contributions to a
pension fund [section 11 (k) (ii)], it should be remembered that, in this case, contributions
must have ceased for a period in the past. The payment of additional contributions is to make
up for the contributions not paid during that period. The rules of the retirement annuity fund
must make provision for this to happen.
This deduction is, however, subject to the following proviso's,

         The deduction will not be allowed if the contribution, had it been made in the year of
          assessment in which it was due, would not have been deductible in terms of section
          11(n) as applicable at the time,
         Should the contribution made, in order to reinstate a full membership, exceed the
          allowable deduction, it may be carried forward to the succeeding year of assessment
          and be deemed to be a contribution so made in that year.
         The "roll over" facility is consequently applicable to both current as well as
          "reinstatement" contributions,

A further provision, applicable to both deductions allowed in terms of section 11(n), is that it
is not necessary that the taxpayer's income be derived from the carrying on of any trade. All
the other deductions allowed under section 11 are only deductible from income derived from
trade. The significance of this exception to the rule is that a person, who, for example, only



US10394                      Pre Course Reading / Reference Material                  39
earns investment income such as interest or annuities, not being income derived from trade,
will nevertheless be entitled to the deduction in respect of contributions to a retirement
annuity fund. Consequently, a retired person may continue contributing to a retirement
annuity fund and claiming these amounts as a deduction, provided, of course, that he has not
reached the age of seventy.

In the case of most salaried taxpayers, the calculation centres on items B and C, since they
have no, or very little, income that is from a non-retirement funding source. There are, of
course, those who earn substantial investment income (interest and annuities) which is
obviously not retirement funding and may, therefore, be used in the calculation of item A.

Income Tax Consequences
Benefits - Annuity
The benefit received by way of an annuity is included in the gross income of the member
when it is received by or accrues to him. (Paragraph (a) of the definition of gross income in
section 1). It is taxed at the member‘s marginal rate.

Income Tax Consequences
Benefits - Lump sum
Upon Retirement
Upon Death

Paragraph (e) of the definition of gross income provides for the inclusion in the gross income
of a taxpayer of any amount, determined in accordance with the provisions of the Second
Schedule in respect of a lump sum benefit from a pension, provident or retirement annuity
fund received by or accrued to the taxpayer who was a member of such a fund.

Lump sum benefits from a fund referred to in paragraph (a) or (b) of the definition of "pension
fund" (i.e. public sector funds) are excluded from the operation of this provision. In other
words, lump sum benefits from these funds are not included in gross income and are
consequently tax-free.

The purpose of the Second Schedule to the Income Tax Act is, as indicated above, to
provide the means for calculating the portion of a lump sum benefit to be included in the
gross income of a taxpayer in terms of paragraph (e) of that definition.

For the purposes of the Second Schedule the term "lump sum benefit" includes
Any amount determined by the commutation of an annuity or portion of an annuity, and
Any fixed or ascertainable amount payable by any pension, provident or retirement annuity
fund.

This definition is wide enough to cover not only the lump sums payable upon the retirement
or death of the member but also benefits payable upon resignation or the winding-up of a
fund as well.

The basis of the calculation of the amount to be included in gross income is two formulae.
Formula A, as it is known, is applicable to pension and provident funds but not to retirement
annuity funds. Only formula B needs to be applied in the case of retirement annuity funds.

This formula is stated as follows:
        Z= C = E - D

Where "Z" - represents the amount to be determined;



US10394                    Pre Course Reading / Reference Material                   40
"C " - represents in the case of pension and provident funds, the sum of the amounts
calculated in formula A in respect of such funds of which he is or was a member and from
which lump sum benefits were or may be derived in consequence of his death or retirement,
and;
            o Represents, in the case of retirement annuity funds the aggregate of lump
                sum benefits received by or accrued to him in the current, or any previous
                year of assessment;
            o Shall not exceed the greater of R120 000 or R4 500 multiplied by the number
                of completed years during the whole of which the taxpayer concerned had
                been a member of one or more pension, provident and retirement annuity
                funds, other than those funds from which he had withdrawn, resigned or had
                been wound-up. This multiplication factor is, however, subject to the following
                provisions [paragraph 5(6)]
            o In the case of a pension or provident fund, in terms of the rules of which, the
                benefits payable to members are determined in accordance with their period
                of employment, the period of membership shall be deemed to be his actual
                period of employment but including any period which, in terms of the rules, is
                required to be taken into account in determining the amount of such benefits;
            o In the case of a retirement annuity fund, where a member had discontinued
                contributions prematurely and had not been reinstated as a full member, he
                shall for these purposes be deemed not to have been a member of the fund
                during the period in respect of which contributions were not made.
"D"- represents lump sum benefits from pension, provident or retirement annuity funds, which
have previously been, received tax free;
"E"- represents the taxpayer's contributions to a pension, provident or retirement annuity fund
that were not allowed as a deduction.

Benefits - Upon Retirement

Membership of more than one fund
The Average Rate

At the outset, it should be remembered that the effect of the Second Schedule is to require
the calculation to be performed every time a member retires from a fund.

Furthermore, one is required to take into account those funds from which the member has
retired in the past and those funds of which he is still a member, with the exception in the
latter case, of retirement annuity funds of which the taxpayer is still a member. It is, therefore,
not possible, in cases where a taxpayer is or has been a member of more than one fund, to
perform the calculation in isolation in respect of only the fund from which he is retiring.

The word "retire" is also defined for the purposes of the Second Schedule. In the case of a
pension, fund it means to retire from employment and become entitled to the payment of an
annuity from such fund. For a provident fund it means to retire from employment and become
entitled to the payment of full benefits in terms of the rules of the fund. Finally in the case of a
retirement annuity fund it means to become entitled to the payment of an annuity from such
fund. (See: Retirement from a retirement annuity fund)

Membership of more than one fund
Membership of more than one fund requires the calculation to be performed taking into
account all other funds past and present. The Second Schedule lays down the rules that
govern the situation. These are:
           o Where an amount has to be determined in accordance with formula A in
               respect of any pension or provident fund of which the taxpayer is still a
               member, it shall be assumed for the purposes of the calculation that


US10394                     Pre Course Reading / Reference Material                      41
           o   The taxpayer will survive the date of his retirement from the fund, and
           o   Until that date, he will continue to be employed at the same salary scale at
               which he is employed at the date of the calculation. [Paragraph 5(3).]
           o   No regard need be had of any retirement annuity fund of which the taxpayer is
               still a member at the time of the calculation. [Paragraph 5(4).]

The Average Rate (Please see the discussion of average rate unde r a pension
fund)


Having calculated the amount, if any, to be included in the gross income of a taxpayer in
respect of lump sum benefits derived from funds, it is necessary to calculate the amount of
tax that the taxable portion of the retirement benefit will attract. Paragraph 7 provides that
any amount determined in accordance with the Second Schedule that is included in the
gross income of any person shall be taxed at the taxpayer's average rate of tax as
determined in terms of section 5(10). The method of determining the average rate was
changed with effect from 1 September 1995. The new formula is applicable to all lump sum
benefits that accrue on or after this date.

The method applied requires the calculation of the taxpayer‘s average rate of tax in the year
of retirement by dividing the amount of tax payable on the taxpayer's "normal" taxable
income before rebates by his "normal" taxable income. "Normal" taxable income excludes
the taxable portion of any lump sum benefits. The product of this calculation is the taxpayer‘s
average rate of tax. This amount is then compared with the taxpayer‘s average rate in the
preceding year of assessment. The higher of these two rates is the rate that will be applied to
the taxable portion of the lump sum benefit.

One of the major changes brought about by the 1995 amendment was the exclusion of the
taxable portion of any lump sum benefits form the taxable income figure used in calculating
the maximum deduction allowed in respect of certain categories of deduction. Deductions
affected are those where the maximum deduction is set at a certain percentage of taxable
income. This includes contributions to a retirement annuity fund, where the maximum
deduction is set at 15% of the taxpayer‘s taxable income [section 11(n)]. Whereas the
taxable portion of lump sum benefits could previously have been used in calculating the
allowable deduction in respect of contributions to a retirement annuity fund, this cannot now
be done when calculating the average rate of tax.

Benefits - Upon Death
In terms of the definition of retirement annuity fund in section 1 of the Income Tax Act, the
benefits payable upon the death of a member may not exceed a refund of contributions (with
or without reasonable interest) and an annuity or annuities to the dependants or nominees of
the deceased member. Since one-third of such annuity or annuities may be commuted this in
effect means that the lump sum death benefit may not exceed:
     A return of contributions with reasonable interest (currently accepted by Inland
        Revenue to be 7% per annum compound), PLUS
     One-third of the difference between the total proceeds and the above amount.
     This is the position irrespective of whether the conditions of membership included life
        cover or not. The balance of the proceeds in excess of the amount so calculated has
        to be applied to purchase an annuity for the benefit of dependants or nominees.
     In the event of the death of a member prior to retirement who does not leave any
        dependants or nominees, the only benefit payable by the fund will be the lump sum
        benefit allowed. It is only in instances where there are dependants and\or nominees
        that the annuity benefit will be paid by the fund. [Definition of retirement annuity fund,
        section 1.] It is, consequently, extremely important for members, who do not have
        dependants as defined, to nominate a beneficiary to receive the benefit on their


US10394                     Pre Course Reading / Reference Material                    42
           death, otherwise a sizeable portion thereof could be lost.

Calculation of the amount of such lump sum to be included in the gross income of the
deceased taxpayer, as in the case of retirement, requires the application of formula B alone.
As in the case of pension and provident funds, the amount is deemed to have accrued to the
deceased member the day before his death. Tax paid in respect of such inclusion may be
recovered from the pension to whom or in whose favour the lump sum accrues. The
parameters set for C in this case are as a member, the greatest of the following:

     1. R60 000; or

     2. The amount the member could have derived by the commutation of the annuity or
        annuities payable to him, assuming he had retired the day before his death, or
     3. One-third of the member's own contributions to the fund together with reasonable
        interest.

This amount may of course not exceed the lump sum death benefit and as in the case of
retirement is further subject to the overall maximum of the greater of R120 000; or R4 500 x
the number of completed years membership of retirement, pension or provident funds

Provident Funds

Introduction
Benefits

South Africa, unlike most Western nations, does not have an advanced social security
system. The pension benefits payable by the state to the aged and the indigent, in most
cases, do not even provide a subsistence income. Consequently, it is largely incumbent upon
the individual to ensure that he has sufficient retirement income.

Most employers these days have a staff retirement fund. It would be a condition of
employment that an employee becomes a member of the provident fund upon commencing
employment. Regular contributions are made both by the employer and the employee
although it is not uncommon to have a non-contributory fund in terms of the rules of which
only the employer makes contributions.

The definition of provident fund in section 1 of the Income Tax Act creates the distinction
between a pension and provident fund. The definition does not restrict a provident fund to
paying its benefits in the form of an annuity. It follows therefore that the provident fund may
pay its benefits in the form of a lump sum. As in the case of a pension fund, membership of a
provident fund is restricted to the employment context, requiring both an employer and an
employee to participate.

“Provident fund” means any fund (other than a pension fund, benefit fund or retirement annuity fund) which is approved by the
Commissioner in respect of the year of asse ssment in question and, in the case of any such fund established on or after 1 Jul y 1986, is
registered under the provisions of the Pension Funds Act, 1956 (Act No. 24 of 1956): Provided that the Commissioner may approve a
fund subject to such limitations or conditions as he may determine, and shall not approve a fund in respect of any year of asse ssment
unless he is in respect of that year of asse ssment satisfied —

That the fund is a permanent fund bona fide established solely for the purpose of providing benefits for employees on retirement from
employment or solely for the purpose of providing benefits for the dependants or nominees of deceased employees or deceased former
employees or solely for a combination of such purposes; and

[Para. (a) substituted by s. 2 (f) of Act No. 21 of 1995.]
that the rules of the fund contain provisions similar in all respects to those required to be contained in the rules of a pen sion fund in
terms of subparagraphs (aa), (bb), (cc), (ee) and (ff) of paragraph (ii) of the proviso to paragraph (c) of the definition of ―pension fund‖;
and




US10394                                 Pre Course Reading / Reference Material                                               43
[Para. (b) substituted by s. 2 (1) (f) of Act No. 94 of 1983.]
that the rules of the fund have been complied with;

[Definition of ―provident fund‖ amended by s. 2 (1) (d) of Act No. 65 of 1986.]


Benefits
The rules of a provident fund will provide for the payment of lump sum benefits. This means
that a provident fund may pay the entire benefit due to a member as a lump sum. It is in this
regard that a provident fund differs substantially from a pension fund. This does not mean
that a provident fund is precluded from paying annuity benefits. If the rules of a fund cater for
the payment of annuity benefits, this may be done. In the absence of rules of this nature, the
benefit will be paid as a lump sum.

A portion of this lump sum benefit may be free of tax. The amount in excess of the tax free
portion will be taxed at the member‘s average rate of tax.

Types of Provident Funds
There are two types of Provident funds:
Insured vs. Self Administered Funds
Defined Contribution vs. Defined Benefit

Insured vs. Self Administe red Funds
Apart from "public sector" provident funds, all other funds would fall into two main categories:

Self administered funds, and Insured funds.

A self administered fund operates as an entity separate from the employer and is
administered by trustees. The trustees comprise representatives of both the employer and
employees in equal numbers. The trustees would consult actuaries, lawyers and portfolio
managers amongst others to assist them in the performance of their duties. Larger provident
funds may employ such people on a full time basis. The provident fund has an identity
separate from the employer, and effective control is in the hands of the trustees. This
represents a significant change from the past, where the employer effectively controlled the
affairs of the fund. The increased power of the unions and amendments to the Pension
Funds Act has changed the balance of power.

An insured provident fund also has legal personality and appointed trustees. The
administrative requirements of such trustees are; however, greatly circumscribed because
the only asset(s) the fund owns is a policy or policies of assurance issued by a life assurer.
Such policy or policies would secure the benefits payable by the fund to its members. The
underwriting life assurer largely performs the various administrative functions. The trustees
would nevertheless be responsible for appointing the institution to underwrite the risk
benefits, administer the fund and manage the investments. They would also be responsible
for the rules of the fund, making amendments as and when necessary.

Self administered funds often contract with life assurers in respect of certain specific matter,
e.g. the underwriting of group life cover, to provide portfolio management services to provide
administrative services, to purchase annuities, etc.

De fined Contribution vs. Defined Be nefit

In a defined contribution fund, or money purchase fund as it is also called, the retirement
benefit is based on the investment return achieved by the fund on the contributions paid by
the member and the employer. The investment risk is therefore that of the member. Nearly
all-provident funds are structured on this basis.



US10394                                   Pre Course Reading / Reference Material     44
By contrast, a defined benefit fund provides that the benefit payable to a retiring member
shall be based on a formula linked to the member‘s remuneration before retirement. The
formula will usually be based on the member‘s period of membership of the fund.

Benefits
The rules of a provident fund will provide for the payment of lump sum benefits. This means
that a provident fund may pay the entire benefit due to a member as a lump sum. It is in this
regard that a provident fund differs substantially from a pension fund. This does not mean
that a provident fund is precluded from paying annuity benefits. If the rules of a fund cater for
the payment of annuity benefits, this may be done. In the absence of rules of this nature, the
benefit will be paid as a lump sum.

A portion of this lump sum benefit may be free of tax. The amount in excess of the tax free
portion will be taxed at the member‘s average rate of tax.

Income Tax Consequences
Approval

The term "provident fund " is defined in section 1 of the Act to be a fund (other than a
pension, benefit or retirement annuity fund), which is approved by the Commissioner. In
respect of funds established after July 1986, a further requirement of approval is that they be
registered under the provisions of the Pensions Fund Act. This means that the rules of the
fund must be submitted to the Registrar of Pension Funds, whose office falls under the
control of the Financial Services Board.

The approval of the Commissioner may be granted subject to such limitations on conditions
as he may determine. He will, however, not approve a fund unless he is satisfied that:
     The fund is a permanent bona fide fund established solely for the purpose of:
     Providing benefits for employees on retirement from employment, or
     Providing benefits for widows, children, dependants or nominees of deceased
       employees or deceased former employees, or
     Providing a continuation of such benefits, and
     The rules of the fund contain provisions similar in all respects to those required of a
       pension fund except that relating to the commutation of annuities.

Income Tax Consequences
Investment Income

The receipts and accruals of provident funds used to be exempt from tax. In addition, those
funds either wholly or partly administered by life assurers were not disadvantaged, since the
amounts derived by assurers from business carried on by them with pension funds was
excluded from assurers' taxable income. It is for this reason that these portfolios were
referred to as untaxed. The returns in untaxed portfolios compared to taxed portfolios (which
housed life assurance business) were always slightly higher for this reason. This situation
changed in 1996 When the Taxation of Retirement Funds Act was passed. This Act provides
for the taxation of the investment income of a provident fund at the rate of 17%. Investment
income is defined as net rental and interest income.
The exposure of a fund to this tax will depend on the type of portfolio the funds assets are
invested in. If there is a significant property or cash holding, the tax liability will be greater
than for a fund which is mainly invested in equities.

Income Tax Consequences


US10394                     Pre Course Reading / Reference Material                    45
Contributions


Employee
No deduction is available in respect of contributions paid by a member to a provident fund.
Prior to the 1989 year of assessment, these contributions together with life assurance
premiums, qualified for a rebate not exceeding the greater of 10% of contributions \premiums
or R75. This rebate has subsequently been abolished and, as a result, no tax relief is
currently available in respect of a member's contributions.

Employer

The employer's contributions to a provident fund are deductible in terms of, and subject to,
the limits prescribed in section 11(l). Consequently, contributions to a provident fund would
have to be aggregated with any contributions made to a pension or benefit fund, in
determining whether the total amount contributed is within the prescribed limits.

Although this section sets a limit of 10% of the approved remuneration of the employee, the
Commissioner has discretion to allow a higher level of contribution as a deduction. It is
common for a contribution of 20% to be allowable.

In the event of an employer contributing a lump sum to a pension fund on behalf of an
employee, the Commissioner may determine that this amount be deducted in a series of
annual installments until the contribution is extinguished.

Income Tax Consequences
Benefits - Upon Retirement

At the outset it should be remembered that the effect of the Second Schedule is to require
the calculation to be performed every time a member retires from a fund. Furthermore, one is
required to take into account those funds from which the member has retired in the past and
those funds of which he is still a member, with the exception in the latter case, of retirement
annuity funds of which the taxpayer is still a member. It is, therefore, not possible, in cases
where a taxpayer is or has been a member of more than one fund, to perform the calculation
in isolation in respect of only the fund from which he is retiring.

The word "retire" is also defined for the purposes of the Second Schedule. In the case of a
pension fund it means to retire from employment and become entitled to the payment of an
annuity from such fund. For a provident fund it means to retire from employment and become
entitled to the payment of full benefits in terms of the rules of the fund. Finally in the case of a
retirement annuity fund it means to become entitled to the payment of an annuity from such
fund.

The calculation in respect of a provident fund requires the application of both formula A and
B. The application of these formulae is the same for both pension and provident funds with
the exception that in the case of a provident fund "C" in formula B, whilst being subject to the
same maximum limit is further subject to a minimum amount of R24 000. (Link to example)

Membership of more than one fund

Membership of more than one fund requires the calculation to be performed taking into
account all other funds past and present. The Second Schedule lays down the rules that
govern the situation. These are
    Where an amount has to be determined in accordance with formula A in respect of



US10394                     Pre Course Reading / Reference Material                      46
          any pension or provident fund of which the taxpayer is still a member, it shall be
          assumed for the purposes of the calculation that
         The taxpayer will survive the date of his retirement from the fund, and
         Until that date, he will continue to be employed at the same salary scale at which he
          is employed at the date of the calculation. [Paragraph 5(3).]
         No regard need be had of any retirement annuity fund of which the taxpayer is still a
          member at the time of the calculation. [Paragraph 5(4).]

The Ave rage Rate

Having calculated the amount, if any, to be included in the gross income of a taxpayer in
respect of lump sum benefits derived from funds, it is necessary to calculate the amount of
tax that the taxable portion of the retirement benefit will attract. Paragraph 7 provides that
any amount determined in accordance with the Second Schedule that is included in the
gross income of any person shall be taxed at the taxpayer's average rate of tax as
determined in terms of section 5(10). The method of determining the average rate was
changed with effect from 1 September 1995. The new formula is applicable to all lump sum
benefits that accrue on or after this date.

The method applied requires the calculation of the taxpayer‘s average rate of tax in the year
of retirement by dividing the amount of tax payable on the taxpayer's "normal" taxable
income before rebates by his "normal" taxable income. "Normal" taxable income excludes
the taxable portion of any lump sum benefits. The product of this calculation is the taxpayer‘s
average rate of tax. This amount is then compared with the taxpayer‘s average rate in the
preceding year of assessment. The higher of these two rates is the rate that will be applied to
the taxable portion of the lump sum benefit.

One of the major changes brought about by the 1995 amendment was the exclusion of the
taxable portion of any lump sum benefits form the taxable income figure used in calculating
the maximum deduction allowed in respect of certain categories of deduction. Deductions
affected are those where the maximum deduction is set at a certain percentage of taxable
income. This includes contributions to a retirement annuity fund, where the maximum
deduction is set at 15% of the taxpayer‘s taxable income [section 11(n)]. Whereas the
taxable portion of lump sum benefits could previously have been used in calculating the
allowable deduction in respect of contributions to a retirement annuity fund, this cannot now
be done when calculating the average rate of tax. This change is best illustrated by way of an
example.

Need to research on death and disability

Income Tax Consequences

Benefits - Upon Withdrawal

A member withdraws from a fund upon resignation, retrenchment, and dismissal or in the
event of the fund being wound-up.

The benefit accruing upon the withdrawal of a member from a provident fund is also paid by
way of a lump sum. The general rule is that the withdrawal benefit will be included in the
gross income of the withdrawing member upon receipt or accrual but for the first R1 800
thereof which will consequently be received free of tax. The amount so included in gross
income qualifies to be taxed at the member's average rate in terms of the rating formula.
[Paragraph 6(d) read with paragraph 7.] An exception to this rule relates to instances where
an amount equivalent to the withdrawal benefit is transferred from one fund to another, such


US10394                      Pre Course Reading / Reference Material                 47
as a preservation fund. If a member withdraws from a provident fund, so much of any lump
sum benefit paid into an approved provident, pension or ret irement annuity fund, for his
benefit, will not be included in his gross income. [Paragraph 6(b).]

If a member of a provident fund retires from the fund before reaching age 55 on grounds
other than ill-health, the benefit will be treated as a withdrawal benefit and will be taxed
according to the provisions discussed above and not in terms of the rules relating to
retirement.

It is important to note that the R1 800 "exemption" is available in each year of assessment
and is not an "once-in-a-lifetime" concession. The benefits payable upon the winding-up of a
fund are treated in exactly the same manner as withdrawal benefits.

Important Considerations
Swing to prov ident funds

In recent years, provident funds have experienced resurgence due largely to two
independent factors, namely:
     The unpopularity of pension funds with the organised labour movement, and
     The advent of provident funds funded by individual life policies.

Trade unions have shown a preference for provident funds over pension funds due largely to
the manner in which the benefits are paid. They have further achieved meaningful
representation as regards the management of the affairs of these funds.

Provident Funds Funded by Individual Life Policies

Provident funds funded by individual life policies have been used to satisfy a need at the
executive end of the retirement planning market.

Instead of the contributions being used to acquire marketable securities and other assets to
be managed by or on behalf of the trustees, these are used to fund the premiums under
individual endowment policies on the lives of the members.

This substitution of individual life policies for other assets to be owned by the trustees thus
allows the individual policy to be ceded to the member at the relevant time, instead of making
an actual cash payment to the member, in discharge of the provident fund's obligation. The
tax advantage of this arrangement is that the member will receive cession of a "matured
endowment policy (assuming it has been owned by the fund for at least five years). This
allows the member to withdraw tax-free amounts from the policy once he has retired. If the
traditional method of paying a cash amount to the member were followed, the member would
not have the advantage of being able to invest the money immediately in a tax-free medium.

Please note that in respect to a second hand policy, these withdrawals are subject to Capital
Gains Tax and therefore not entirely tax-free.

It is convenient to structure this type of fund as an umbrella fund, which allows the benefits to
be offered to multiple employers without the necessity of having to register a new fund in
each case.

The benefit paid to a member upon his resignation or retirement is taxed in accordance with
the provisions of paragraph (e) of the definition of gross income. For this purpose, the
surrender value of the policy ceded to the member shall be deemed a lump sum benefit



US10394                    Pre Course Reading / Reference Material                     48
accruing to the member on the date of the cession (paragraph 4(2) bis.)
The death of the member before retirement would result in the termination of the policy and
the payment to the fund of a death benefit. Consequently, the benefit paid to the deceased
member's dependants would be a cash lump sum and would be taxed in the usual manner.

Estate Duty Consequences
The lump sum benefit that accrues to the member's dependants or beneficiaries is dutiable in
the deceased estate as deemed property [Section 3(3)(a) bis ]. The dutiable value of the
benefit will be reduced by an amount equal to the member's contributions plus com pound
interest at a rate of 6% p.a.

Common Period of Membership
Mr. Smith is a member to a pension fund and a provident fund. He retires from both funds on
30 November 1995 and receives the following lump sum amounts:
R450 000 from the provident fund, which he joined on 1 November 1980
R300 000 from the pension fund, which he joined on 1 January 1965
His highest average annual salary (HAAS) in any five consecutive years is R100 000. How
would the proviso regarding the common period of membership of the two funds be applied
in the circumstances?

SOLUTION
The common period of membership is 15 years (1/11/1980 to 1/11/1995) - It should be
remembered that the Act refers to completed years of membership). This period can only be
applied to one of the funds. His options are therefore the following:
    Apply 30 years of membership to the pension fund and 0 years to the provident fund,
       or
    Apply 15 years of membership to the pension fund and 15 years to the provident
       fund.

In order to determine which would be most beneficial you would need to compare the
average salary figure applicable to the two funds. In this instance because Mr. Smith is
retiring from both funds at the same time, his highest average salary figure is the same and
therefore it makes no difference which fund the common period is applied.

If however, Mr. Smith retired from the funds at different times and his highest average annual
salary figures differed, then it would pay him to apply the common period to the fund with the
highest figure to maximise Y in formula A.

Lets say Mr. Smith retired from the pension fund in 1995 when his HAAS figure was R50 000
and retired from the provident fund 5 years later when his HAAS figure was R60 000.

First option:
Formula A for the first option would produce the following result:
Pension fund Y = 30/10 x R50 000
= R150 000
Provident fund Y = 5/10 x R50 000 *
= R25 000
Therefore Y = R175 000.

*Certain assumptions are required to be made when working with the Second Schedule
formulae. One of these is that the taxpayer will survive his retirement from funds of which he
is still a member and will continue to earn his/her income until retirement. That is why we
take into account the five extra years of membership in the provident fund, even though that
is still in the future. [Paragraph 5(3) of the Second Schedule]



US10394                    Pre Course Reading / Reference Material                  49
Second Option:
Formula A for the second option would produce the following result:
Pension fund Y = 15/10 x R50 000
= R75 000
Provident fund Y = 20/10 x R60 000
= R120 000
Therefore Y = R195 000

This shows that by applying the common period to the fund with the highest HAAS figure, Y
is increased.

Membership of more Than 1 Fund
Mr. Tubar commenced employment with Agro (Pty) Ltd on 01 January 1966, at which time he
joined the company's pension fund. On 01 March 1975, he was appointed to the board and
joined the XYZ provident fund of which all directors were members. He retired from XYZ
provident fund on 31 March 1992 upon relinquishing his directorship and received a lump
sum of R100 000. His contributions to the provident fund amounted to R22 000. His highest
average annual salary for any five consecutive years at the time was R55 000.

On 31 December 1995, he retired and received a lump sum of R150 000 from the pension
fund. For the last 5 years of employment his salary was R55 000, R58 000,
R64 000, R70 000, and R74 000.

SOLUTION
Retirement from the Provident Fund - 31 March 1995
Formula A
Y = N\10 x average salary
Provident fund 17\10 x R55 000 = R 93 500
Pension fund 12\10* x R55 000 = R 66 000
R159 500

"Y" in Formula A becomes "C" in Formula B, but "C" is subject to the following limits:

Not greater than the greater of
R120 000, or
R4 500 x 26* = R117 000
And not less than R24 000

Therefore, "C" = R120 000

Formula B
Z= C + E - D
= R120 000 + R22 000 - 0
= R142 000

Therefore,
Lump sum benefit from provident fund R100 000
LESS: tax free portion ["Z"] R142 000

Inclusion in gross income [paragraph (e)] NIL
Retirement from Pension Fund - 31 December 1995

Formula A
Y = N\10 x average salary


US10394                     Pre Course Reading / Reference Material                  50
Provident fund = 0\10 x R55 000 = R0
Pension fund = 29\10*** x R60 000**** = R174 000
R174 000

"Y" in formula A becomes "C" in formula B but "C" is subject to the following limits

Not greater than the greater of
R120 000, or
R4 500 x 29 = R130 500
And not less than R24 000

Therefore, C = R130 500

FORMULA B
Z= C + E - D
= R130 500 + R22 000 - R100 000
= R52 500

Therefore,
Lump sum from pension fund R150 000
LESS: Tax free portion ("Z") R 52 500
Inclusion in gross income [paragraph (e)] R 97 500
========
NOTES
*The completed period of membership of the provident fund is 17 years. If we apply this
period to the provident fund, we cannot apply it to the pension fund. Consequently, "N" in
respect of the pension would have to be reduced by 17. It should be remem bered that, we
have to assume that Mr. Tubar will survive his retirement from the pension fund.

Based on this assumption he will have been a member of the pension fund for 29 completed
years, less the 17 year common period applicable to the provident fund results in "N" being
12 years for the pension fund. Since the average salary in respect of both the pension and
the provident fund is the same, it does not matter to which fund the common period is
applied, the result remains the same.

**Mr. Tubar has been a member of funds since 01 January 1960. At the time of his
retirement from the provident, this period of membership amounts to 26 completed years.

***Mr. Tubar has the option of applying the common period to either of the funds. Since Mr.
Tubar's average salary is higher in respect of the pension fund, the best result is achieved by
applying the common period to this fund.

****Mr. Tubar's highest average salary in any five consecutive years amounts to R64 200.
This is, however, subject to a maximum of R60 000.

Retirement from a Provident Fund

Assume that the only fund of which Mr. Smith was a member was the ABC provident fund.
Upon his retirement he a lump sum of R850 000. He joined the fund on 01 January 1969 and
retired on 30 June 1995. His contributions to the fund amounted to R150 000. His highest
average salary during any five consecutive years was R54 000. The calculation would be as
follows -

Formula A
Y = N\10 x average salary


US10394                     Pre Course Reading / Reference Material                    51
= 26\10 x R54 000
= R140 400

"Y" becomes "C" in formula B subject to the limitations imposed,
Maximum is the greater of

R120 000, or
R4 500 x 26* = R117 000

Minimum is R24 000
*This represents the number of completed years during which the taxpayer was a member of one or more funds.
Therefore, "C" will be limited to R120 000

Formula B
Z= C + E - D
= R120 000 + R150 000* - 0**
= R270 000


* This represents Mr. Smith‘s contributions that were not deductible.
** Since this is the only fund of which Mr. Smith is a member, he would not have previously received a lump sum.
Therefore,
       Lump sum benefit                     R850 000
       LESS: Tax free portion ("Z")         R270 000
       Inclusion in gross income [para (e)] R580 000


Divorce Act
In 1989, an amendment to the Divorce Act (section 7) brought retirement fund benefits into
the divorce arena for the first time. Previously, a member‘s interest in a retirement fund was
ignored upon divorce because no benefit had yet accrued to the member.
The amendments provide for the definition of a pension interest in respect of pension and
retirement annuity funds. Once determined this interest can be awarded in whole or in part to
the non-member spouse as part of the divorce settlement. One of the biggest problems
experienced with the implementation of this provision is the lack of appreciation of the fact
that the benefit can only be paid to the non-member spouse once the member receives a
benefit from the fund. Unfortunately, many attorneys have shown complete ignorance of the
law in the manner in which divorce settlement agreements have been drafted. Many of these
will be incapable of execution leaving the non-member spouse with an enormous problem.

These provisions apply to all divorces awarded after 1/8/1989. It does not apply to marriages
entered into after 1/11/1984 by ante nuptial contract in which community of property, profit
and loss and the accrual system has been excluded.

The pension interest is defined as follows:
    In the case of a pension fund – the member would have been entitled had he
      resigned from the fund on the date of divorce to the benefit.
    In the case of a retirement annuity fund – it is the contributions paid to the fund until
      the date of divorce plus simple interest at the prescribed rate of interest. (The
      prescribed rate of interest is promulgated in terms of the Prescribed Rate of Interest
      Act 55 of 1975 and is currently 15,5%)

The benefit awarded to the non-member spouse is only payable once the member becomes



US10394                               Pre Course Reading / Reference Material                                      52
entitled to a benefit. This would happen on his death, retirement, resignation, retrenchment,
or dismissal. This event could occur decades after the divorce has been granted. The benefit
payable could be rendered meaningless because there is insufficient recognition of the time
value of money in the calculation of the pension interest.

Additional problems are caused by the fact that it is the member spouse who has to bear the
tax on the benefit. The non-member spouse receives the benefit tax-free.
From an Estate Duty perspective, the member will have any lump sum benefits included as
deemed property, but will be allowed a deduction of the amount paid to the non-member
spouse as a debt due by the estate. [Sections 3(3)(a) read with section 4(b) of the Estate
Duty Act]




US10394                   Pre Course Reading / Reference Material                  53
3 Section 3: Example of an actual set of rules for a Provident
    Society – Retirement Annuity Fund




                          Rules of the


               Xtra Provident Society




             Retirement Annuity Fund




US10394            Pre Course Reading / Reference Material   54
4 CERTIFICATE IN ACCORDANCE WITH REGULATION 18
                  1    OF THE PENSION FUNDS ACT, 24 OF 1956



This is to certify that these are the revised RULES of the Xtra Provident Society of South
Africa, which will become effective on 1 October 2001 and that the FUND shall be
operated in terms of these revised RULES, from 1 October 2001. The new name of the
Fund from 1 October 2001 will be the Xtra Provident Society Retirement Annuity Fund.


It is recorded that the reason for the amendments is because of the re-organisation of
the Xtra Provident Society of South Africa as required by the Financial Services Board.

The reason for the name change is to bring the official name of the Fund into line with
the name by which it is generally known.



   __________________________________    _________________________
             CHAIRMAN: BOARD OF TRUSTEES           DATE



   __________________________________                       _________________________
             TRUSTEE                                                  DATE



   _________________________________                        _________________________




US 10394                      Pre Course / Reference Material                       55
  PRINCIPAL OFFICER                            DATE INDEX
     RULE                            SUBJECT                 PAGE
       1       NAME                                            1
       2       REGISTERED OFFICE                               1
       3       DEFINITIONS                                     1
       4       OBJECT                                          3
               MANAGEMENT                                      4
       5       Legal persona                                   4
      6.1      Administration of the fund                      4
      6.2      Appointment and retirement of Board members     4
      6.3      Procedures of the Board                         6
       7       Powers and duties of the Board                  7
       8       Principal Officer                               9
       9       Books of account                                9
      10       Auditor and Valuator                            9
      11       Administration expenses                        10
      12       Signing of documents                           10
      13       Liability                                      10
      14       Fidelity guarantee                             11
               MEMBERSHIP                                     11
      15       Eligibility                                    11
      16       Commencement and termination of membership     11
               CONTRIBUTIONS                                  12
      17       Contributions                                  12
               BENEFITS                                       13
      18       Selection of benefits                          13
      19       Retirement date                                14
      20       Retirement benefit                             14
      21       Commutation of annuity                         14
      22       Benefits on death                              15
      23       Type of annuity                                15
      24       Disability benefits                            15
      25       Benefits inalienable                           16
               GENERAL                                        16
      26       Payment of benefits                            16
      27       Death benefits                                 18
      28       Increased benefits                             20
      29       Copies of documents                            21
      30       Amendments of the rules                        21
      31       Disputes                                       21
      32       Amalgamation                                   21
      33       Winding-up                                     22




US 10394                 Pre Course / Reference Material            56
NAME
1.   A FUND known as the XTRA PROVIDENT SOCIETY OF SOUTH AFRICA was
     established with effect from 8 July 1941 and registered as a pension fund during
     August 1963. The name of the FUND has been changed to the XTRA
     PROVIDENT SOCIETY RETIREMENT ANNUITY FUND with effect from 1
     October 2001.

REGISTERED OFFICE
2.   The registered office of the FUND is situated at 6 Boundy Road, Parktown,
     Johannesburg, but the BOARD shall have the right to transfer such office to any
     other situation should circumstances so dictate.
DEFINITIONS
3.   In these rules words defined in the ACT bear the meaning thus assigned to them
     and unless inconsistent with the context, all words and expressions importing the
     masculine gender shall include the feminine; words signifying the singular shall
     include the plural and vice versa; and the following expressions shall have the
     following meanings:

       ACT:       The Pension Funds Act, No. 24 of 1956, as amended, and the
                  regulations framed there under and any supervening Act which
                  replaces it and any amendments and regulations promulgated
                  thereunder
       AGREEMENT: The AGREEMENT concluded between the FUND and the INSURER
                  recording the specific arrangements for the administration,
                  underwriting and investment functions to be performed by the
                  INSURER on behalf of the FUND.
       AUDITOR:   An AUDITOR registered under the Public Accountants' and
                  Auditors' Act, No. 80 of 1991.
       BOARD:     The BOARD, which controls and manages the FUND in terms of
                  these rules.




US 10394                     Pre Course / Reference Material                    57
       DEPENDANT: In relation to a MEMBER, means
           1.    a person in respect of whom the MEMBER is legally liable for
                 maintenance;
           2.    a person in respect of whom the MEMBER is not legally liable for
                 maintenance, if such person:
           2.1   was in the opinion of the BOARD, upon the death of the MEMBER in
                 fact dependent on the MEMBER for maintenance;
           2.2   is the spouse of the MEMBER, including a party to a customary union
                 according to Black law and custom or to a union recognised as a
                 marriage under the tenets of any Asiatic religion;
           2.3   is the child of the MEMBER, including a child born after the death of
                 the MEMBER, an adopted child or an illegitimate child.
           3.    a person in respect of whom the MEMBER would have become legally
                 liable for maintenance, had the MEMBER not died.
      FINANCIAL PRODUCTS:        Products supplied by the INSURER and/or XPS INS.
                                 CO. such as, but not limited to, unit trusts, money and
                                 capital market instruments, and insurance policies to
                                 provide those benefits which the FUND grants to a
                                 MEMBER.
      FUND:                      Xtra Provident Society Retirement Annuity Fund.
      INDEPENDENT                Any INDEPENDENT BOARD MEMBER/S appointed
      BOARD MEMBER/S:            by XPS or XPS LTD who:-
                                        is not an employee of the FUND, the INSURER,
                                         XPS, XPS LTD or any of its subsidiaries or
                                         associated entities;
                                        is not controlled by the FUND, the INSURER,
                                         XPS, XPS LTD or any of its subsidiaries or
                                         associated entities;
                                        does not control the FUND with the INSURER
                                         or XPS, XPS LTD or any of its subsidiaries or
                                         associated entities;
                                        does not render any other services to the
                                         FUND, the INSURER, XPS, XPS LTD or any of its
                                         subsidiaries or associated entities.
      INSURER:                   The insurance organisation underwriting the benefits
                                 of the FUND.
      MASTER CONTRACT:           The Master Contract entered into between the
                                 members, XPS LTD. and XPS INS. CO.
      MEMBER:                    Any person who has been admitted to membership of
                                 the FUND, in terms of these rules.
      NOMINEE:                   In respect of a MEMBER, a person who has been
                                 appointed by the MEMBER to receive benefits in the
                                 event of the MEMBER's death.
      XPS:                       Xtra Provident Society of South Africa.
      XPS LTD.                   Xtra Provident Society Limited (Limited by Guarantee)
                                 (Registration number 2001/011016/09).
      XPS INS. CO:               Xtra Provident Society Insurance Company Limited
                                 (Registration number 2001/017730/06).



US 10394                      Pre Course / Reference Material                     58
      REGISTRAR:               The Registrar of Pension Funds appointed under the
                               ACT.

OBJECT
4.  The object of the FUND is to provide life annuities for MEMBERS or annuities for
    the DEPENDANTS or NOMINEES of deceased MEMBERS, subject to the provisions
    of these rules.




US 10394                    Pre Course / Reference Material                    59
MANAGEMENT
5.    Legal persona
      The FUND shall be capable in law of suing and of being sued in its own name and
      of acquiring, holding and alienating property, movable and immovable.
6.1 Administration of the fund
      The administration and control of the FUND shall be vested in the BOARD.
6.2 Appointment and retirement of Board members
6.2.1 It is recorded that the FUND holds a current exemption in terms of Section
      7B(1)(b) of the ACT in terms of which the fund is exempt from the requirement
      that members of the FUND are entitled to elect fifty percent of the BOARD
      members, which exemption expires at midnight on 25 January 2002.
6.2.2 In terms of the aforesaid exemption BOARD members are currently appointed by
      the Board of XPS which will subsequently be superseded by the Board of XPS Ltd.
      XPS or XPS LTD, as the case may be, may, for as long as an exemption is in place
      in terms of Section 7B(1(b) of the Act, appoint Board members (including
      INDEPENDENT BOARD MEMBERS) and remove any of them from office on written
      notice to the FUND.
6.2.3 On or before 25 January 2002, or before any subsequent exemption in terms of
      Section 7B(1)(b) of the ACT granted to the FUND has expired, the BOARD shall
      continue to consist of persons appointed by XPS or XPS LTD. whereafter the
      BOARD shall be elected in compliance with the ACT.
6.2.4 The BOARD shall at all times consist of a minimum of four members nominated by
      XPS or XPS LTD plus at least one INDEPENDENT BOARD MEMBER nominated by
      XPS or XPS LTD and if the election in terms of the Act foreshadowed in rule 6.2.3
      above has to take place the BOARD shall consist of a minimum of eight members
      and the MEMBERS shall be entitled to elect at least fifty percent of the number of
      such BOARD members.




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6.2A If    the BOARD members are to be elected by the MEMBERS, they shall be elected
     in    accordance with the following provisions:
6.2A.1      The BOARD regulates the elections.
6.2A.2     The BOARD must arrange the first election before any exemption granted to
           the FUND in terms of Section 7B(1)(b) of the ACT expires. Thereafter the
           BOARD must arrange an election every three years. The BOARD must also
           arrange by-elections if necessary.
6.2A.3     Only persons nominated by MEMBERS beforehand may be elected.
6.2A.4     Each MEMBER may nominate as many persons for election as BOARD members
           as may be elected by MEMBERS at the time.
6.2A.5     Each nomination must be in writing and seconded by another MEMBER.
6.2A.6     The BOARD members must be elected by the MEMBERS by ballot.
6.2B       The other half of the number of BOARD members who have not been elected
           by MEMBERS may be appointed by XPS LTD. on written notice to the FUND.
           XPS LTD may by written notice to the FUND, from time to time, remove those
           BOARD members it appoints and appoint other BOARD members in their place.
6.2C        A BOARD member's term of office (whether he is elected or appointed by XPS
           or XPS LTD) shall cease:
6.2C.1     if he dies, or resigns and gives written notice to this effect to the FUND and
           other BOARD members; or
6.2C.2     if he becomes incompetent to be a director of a company in terms of the
           Companies Act, 1973; or
6.2C.3     if the BOARD has taken a resolution to remove him from his office because, in
           the opinion of the BOARD, he is guilty of misconduct or neglecting his duties,
           after he has had a chance to state his case; or
6.2C.4      after the expiry of three years since the date of appointment to the post.
            A BOARD member whose term of office has expired, may be re-appointed (or
           re-elected) if he is willing and otherwise competent to hold office.
6.2C.5     if he is appointed by XPS LTD. and thereafter ceases to be either a member of
           the board of directors of XPS LTD. or an employee of XPS INS. CO.
6.2D       MEMBERS may elect an alternate for every elected BOARD member. An
           alternate elected by MEMBERS shall be elected in accordance with the
           provisions of rule 6.2A.
           The provisions of rules 6.2B and 6.2C apply mutatis mutandis to alternate
           BOARD members.
6.2E       For as long as the FUND is exempted from the requirements of the ACT relating
           to the appointment of Board members in terms of Section 7B(1)(b) of the ACT,
           XPS or XPS LTD may on written notice to the FUND appoint and remove all
           Board members in its entire and unfettered discretion; prov ided always that
           there shall at all times be at least one INDEPENDENT BOARD MEMBER.
6.2F       After the transfer of certain of the assets and liabilities of XPS to XPS LTD, XPS
           INS. CO. and the XPS Beneficiaries Trust in terms of Section 14 of the ACT has
           taken place (which transfer is to take place on 30 September 2001), all
           functions in terms of these rules which are or could be exercised by XPS, shall
           thereafter be exercised by XPS LTD, alone.
6.3         Procedures of the Board
6.3.1      The BOARD members annually during January must elect by majority vote one



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           of the BOARD members to act as chairman of the BOARD and another to act as
           deputy chairman of the BOARD. If the chairman and deputy chairman of the
           BOARD are both absent from any meeting of the BOARD, the BOARD members
           present must elect a chairman for that meeting from their number. If a
           majority decision cannot be reached regarding the election of the chairman
           and/or deputy chairman of the BOARD or, in the absence of both of them from
           a particular meeting of the BOARD, the election must be decided by the toss of
           a coin. The BOARD may lay down rules with regard to the procedures of the
           BOARD, which may not be inconsistent with the rules.
6.3.2      Proper notice of at least fifteen days of an ordinary meeting of the BOARD must
           be given to each BOARD member. If all the BOARD members agree thereto,
           the notice period may be waived.
6.3.3      A quorum consisting of four BOARD members (and only where the provisions of
           rule 6.2A have been applied, two of whom must have been elected by the
           MEMBERS and two of whom must have been appointed by XPS LTD.), is
           required for concluding business. Where an INDEPENDENT BOARD MEMBER
           has been appointed, at least one INDEPENDENT BOARD MEMBER must be
           present for a quorum to be formed. At a meeting of the BOARD, all resolutions
           must be decided by a majority vote. If a majority cannot be obtained in
           respect of a specific matter, the chairman of the meeting shall have a casting
           vote in addition to his deliberative vote.
6.3.4      A resolution in writing signed by all the BOARD members, or a decision
           dispatched by e-mail to all the BOARD members and confirmed by them as
           required therein, is of the same force and effect as a resolution passed at a
           meeting of the BOARD and shall be recorded as such at the next meeting of the
           BOARD
6.3.5      All resolutions by the BOARD passed at a meeting or otherwise must be
           recorded in the form of written minutes.

7.    Powers and duties of the Board
7.1   The BOARD must carry out the objects of the FUND. In so doing the BOARD must
      direct, control and oversee the operations of the FUND in accordance with these
      rules and the applicable laws.
7.2 Without detracting in any way from the generality of the prev ious prov ision, the
      BOARD has the following powers and duties:
7.2.1 to receive, administer and apply, invest and re-invest the monies of the FUND or
      to procure that any or all of the same is done by the INSURER and/or other
      competent person/s in such manner as is permitted by the ACT;
7.2.2 to enter into and give effect to the AGREEMENT;
7.2.3 to act on behalf of the MEMBERS and/or their DEPENDANTS in all dealings with
      the INSURER and XPS LTD. concerning the FUND, with powers to make decisions
      on behalf of the MEMBERS in connection with the conditions and/or
      administration, investment and underwriting of the FUND;
7.2.4 to make arrangements for the completion of membership application forms and
      applications for increases in benefits;
7.2.5 to issue membership certificates to all MEMBERS of the FUND;
7.2.6 to collect all contributions due by MEMBERS and pay such contributions to the
      INSURER (in the manner prescribed by the AGREEMENT) or XPS INS CO. as the



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      case may be;
7.2.7 to transfer, at the written request of a MEMBER or a MEMBER's DEPENDANT or
      NOMINEE, the liabilities of the FUND toward the MEMBER or the DEPENDANT or
      NOMINEE fully or in part to a retirement annuity fund or any life insurer registered
      in terms of the Long-term Insurance Act, No. 52 of 1998, designated by the
      MEMBER or the DEPENDANT or NOMINEE. The BOARD may transfer these
      liabilities thus only when the MEMBER or the DEPENDANT or NOMINEE becomes
      entitled to the payment of benefits in terms of these rules which is from age fifty -
      five in the case of a MEMBER;
7.2.8 at the transfer of any of the FUND's liabilities to a MEMBER or a MEMBER's
      DEPENDANT or NOMINEE to a designated retirement annuity fund, or registered
      life insurer to pay an amount to that institution equal to the cash value of the
      liabilities toward the MEMBER or the DEPENDANT or NOMINEE transferred thus by
      the FUND. This cash value is to be calculated by the INSURER or XPS LTD. or XPS
      INS. CO. as the case may be;
7.2.9 to accept transfers to the FUND as contemplated in rule 17.3;
7.2.10 to open a bank account in the name of the FUND;
7.2.11 to keep all title deeds and securities belonging to or held by the FUND in
          safekeeping at the FUND's bank or in the securities department of XPS INS.
          CO.;
7.2.12 to terminate the AGREEMENT after having given 90 (ninety) days notice to this
          effect to the INSURER;
7.2.13 to delegate any of its powers and duties to any institution or person, including a
          committee of BOARD members;
7.2.14 to undertake the general management of the FUND in accordance with these
          rules and generally to take all such other steps as are in its opinion conducive
          to the attainment of the objects of the FUND.

8.    Principal Officer
      The Principal Officer of the FUND shall be appointed and may be removed by the
      BOARD from time to time.

9.    Books of account
      The BOARD shall cause to be kept such accounts, entries, registers and records as
      are essential for the proper functioning of the FUND. The books of account shall
      be balanced at the end of each financial year, which shall be 31 December, and
      shall be audited by the AUDITOR of the FUND.

10. Auditor and Valuator
10.1 The AUDITOR of the INSURER shall be the AUDITOR of the FUND.
10.2 The AUDITOR of the FUND shall have access to all books, papers, vouchers,
     accounts and documents connected with the FUND and shall certify in writing the
     result of each audit.
10.3 The BOARD shall apply to the REGISTRAR for exemption from the requirement
     that the financial condition of the FUND be investigated and reported upon by a
     valuator. If the REGISTRAR does not grant exemption the BOARD shall appoint
     (and may remove) a valuator.




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11. Administration expenses
11.1 Subject to rule 11.2, expenses in connection with the administration of the FUND
     shall be recovered from the fee allowed by the INSURER and shall not be
     charged upon the general funds of the FUND.
11.2 The BOARD shall deal in such a manner as it may deem fit with any profits
     arising from the fee allowed by the INSURER and shall take such action as it may
     deem necessary to recover any administration expenses not covered by the fee.
11.3 BOARD members may be remunerated for services rendered to the FUND by
     them in their capacity as BOARD members. The BOARD will from time to time
     decide on equitable remuneration for such services.

12.    Signing of documents
       The BOARD is empowered to authorise such of its members and/or officers as it
       may approve from time to time, and upon such terms and conditions as may be
       approved by it, to sign any document binding the FUND or any documents
       authorising the performance of any act on behalf of the FUND, provided that
       documents to be deposited with the REGISTRAR shall be signed in the manner
       prescribed by the ACT.

13.    Liability
13.1   Members of the BOARD shall not be liable personally for any loss that may occur
       to a MEMBER of the FUND, and/or to a DEPENDANT of a MEMBER even where
       such loss arises as a result of the action of the BOARD, provided always that
       such action shall be bona fide and within the provisions of these rules.
13.2   The liability of the INSURER shall be determined exclusively by the conditions of
       the AGREEMENT and the laws of the Republic of South Africa and the contracts
       pertaining to the FINANCIAL PRODUCTS and in the event of any conflict between
       these rules and any contract and/or the AGREEMENT, the provisions of such
       contract, the AGREEMENT and the laws of the Republic of South Africa, as the
       case may be, shall prevail.

14. Fidelity guarantee
14.1 The BOARD shall arrange for the FUND to be covered under fidelity insurance
     against any loss arising from the negligence, dishonesty or fraud of any of the
     FUND's officers.
14.2 The BOARD shall cause the AGREEMENT to contain a Rule whereby the INSURER
     shall indemnify the FUND against any loss arising from the negligence or
     dishonesty of any of the INSURER's officers.

MEMBERSHIP
15. Eligibility
    All members of XPS LTD. and members of the staff of XPS LTD. and XPS INS. CO.
    shall be eligible for membership of the FUND. A MEMBER of the FUND shall be
    permitted to continue as such after he has ceased practicing a profession or in the
    case of a staff member, after he has ceased to be a staff member. MEMBERS of
    the FUND who do not participate in the benefits set out in the MASTER
    CONTRACT, shall be associate members of XPS LTD.



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16. Commencement and termination of membership
16.1 Membership of the FUND will commence on the first day of the calendar month
     during which payment of the first contribution is received by the FUND unless
     otherwise arranged between the FUND and the INSURER or XPS LTD. as the case
     may be, it being understood that if a contract is issued in respect of a person who
     is not yet a MEMBER of the FUND, the date of commencement of membership
     shall be the date of commencement of the contract. Application for membership
     must be made on forms supplied by the FUND and shall include any forms which
     XPS LTD and/or the INSURER may require to be completed.
16.2 Each MEMBER will be provided with a membership certificate.




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16.3 A MEMBER’s participation in the FUND shall terminate:
     - at the MEMBER’s death; or
     - if the MEMBER’s full retirement benefit is commuted for a single payment as
         contemplated in rule 21; or
     - if the MEMBER elects at retirement an annuity purchased in the name of the
         MEMBER as contemplated in rule 26.1.2; or
     - in the instance where the MEMBER’s benefits are secured by an insurance
         policy and the MEMBER ceases to make further contributions before the policy
         has acquired a paid-up value; or
     - if the FUND’s liabilities towards the MEMBER have been transferred to a
         retirement annuity fund or registered insurer selected by the MEMBER.
     - if a MEMBER’s membership of XPS LTD. is terminated for any reason, in which
         event the MEMBER’s participation in the FUND shall forthwith be paid up (or in
         the discretion of the Board may continue subject to such conditions as the
         BOARD may impose) and the MEMBER shall only remain a MEMBER of the
         FUND until his retirement benefit is drawn or transferred, but not a member of
         XPS LTD.
16.4 A MEMBER who has discontinued his contributions prematurely may, on payment
     of his current contributions to the FUND and on fulfilling such conditions as may
     be determined by the BOARD, be reinstated as a MEMBER, provided that he is also
     a MEMBER of XPS LTD, or a current employee of XPS INS. CO.

CONTRIBUTIONS
17. Contributions
17.1 Contributions are calculated in accordance with the benefits elected by the
     MEMBERS in terms of rule 18. Contributions are payable as a single payment, or
     monthly, quarterly, half-yearly or yearly in advance, subject to a minimum
     determined by the BOARD according to its normal practice.
17.2 All contributions are payable to the registered office of the FUND subject to such
     exception as may be agreed upon between the FUND and the INSURER or XPS
     INS. CO. as the case may be.
17.3 MEMBERS are allowed to make additional contributions by way of transfer of
     MEMBERS' interests in approved pension funds, provident funds or other
     retirement annuity funds. The pension secured by such additional contributions
     will be quoted by the FUND as and when such contributions are made.
     "Approved" in this rule 17.3 shall mean registered with the Registrar of Pension
     Funds in terms of section 4 of the ACT and approved by the Commissioner for the
     South African Revenue Service in terms of the Income Tax Act, No. 58 of 1962 (as
     amended).
17.4 Seven days' grace shall be allowed to the FUND for the payment of the
     contributions to the INSURER.

BENEFITS
18. Selection of benefits
18.1 On joining the FUND a MEMBER may select the benefits for which he wishes to
     provide taking into account the types of FINANCIAL PRODUCTS then available
     under the FUND.



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18.2 As from the first day of any calendar month after his date of entry, a MEMBER
     may commence purchasing additional benefits, subject to the provisions of rule
     17.
18.3 MEMBERS will be allowed to have one type of FINANCIAL PRODUCT converted to
     another on such terms and conditions as will be made available by the INSURER or
     the FUND as the case may be.




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19.   Retirement date
      Various retirement dates are available, but even after a MEMBER has elected a
      certain retirement date he shall have the option of accelerating or deferring the
      retirement date provided that no MEMBER shall become entitled to the
      commencement of any annuity after he reaches the age of seventy years or,
      except in the case of a MEMBER who becomes permanently incapable through
      infirmity of mind or body of carrying on his occupation, before he reaches the age
      of fifty-five years.

20.   Retirement benefit
      A MEMBER's retirement benefit is an annuity prov ided by a registered insurer
      which shall be payable at least until the death of the MEMBER.

21. Commutation of annuity
21.1 Not more than one-third of the total value of any annuities to which any person
     becomes entitled, may be commuted for a single payment except where the
     annual amount of such annuities does not exceed R1 800 (one thousand eight
     hundred rand) or such amount as the Minister of Finance may from time to time
     determine by notice in the Government Gazette.
21.2 At the MEMBER's request the FUND will cede the underlying FINANCIAL
     PRODUCTS providing his retirement benefits to him in lieu of a lump sum
     payment.
21.3 No portion of any annuity payable to a DEPENDANT or NOMINEE of a deceased
     MEMBER may be commuted later than six months after the date of death of such
     MEMBER.




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22. Benefits on death
22.1 At the death of a MEMBER the benefits provided by the FINANCIAL PRODUCT(S)
      selected by him, will become available.
22.2.1 Subject to the conditions of rule 21, the executor of the MEMBER's estate, a
          DEPENDANT or NOMINEE, as the case may be, may commute a portion of the
          value of the annuities to which he becomes entitled for a lump sum payment,
          on condition that the total amount of all such lump sum payments shall not
          exceed the sum of the amounts, with reasonable interest thereon, contributed
          by the MEMBER.
22.2.2 In the event that two or more of the parties mentioned in this rule want to
          commute their respective annuities to the extent that the total amount of all
          such lump sums will exceed the maximum defined in this rule, the BOARD shall
          decide as to the amount of the lump sum payable to each party.
22.3 The balance of the benefit, if any, shall be employed to purchase an annuity or
      annuities in accordance with rule 26 (a portion of such annuity or annuities may
      be commuted in terms of rule 21).
22.4 Where a MEMBER dies after he has availed himself of an annuity purchased in the
      name of the FUND as contemplated in rule 26.1.1, such annuity shall continue to
      be paid to his DEPENDANTS or NOMINEES for the unexpired portion (if any) of the
      minimum term applicable to such annuity.

23.   Type of annuity
      A MEMBER, DEPENDANT or NOMINEE, as the case may be, may select any one
      type of annuity from a registered insurer as contemplated in rule 26.1.

24.   Disability benefits
      A MEMBER may on becoming a MEMBER of the FUND or at any stage thereafter
      apply for such disability benefits as are available in terms of the FINANCIAL
      PRODUCTS then being issued by the INSURER or the FUND or XPS INS. CO.
25.   Benefits inalienable
      Save for the provision for commutation of a portion of the annuity in terms of rule
      21, no benefits payable in terms of these rules, including an annuity purchased in
      the name of the MEMBER, DEPENDANT or NOMINEE, shall be capable of being
      surrendered, commuted or assigned or of being pledged as security for any loan,
      or form part of the estate of the MEMBER or DEPENDANT.

GENERAL
26.    Payment of benefits
26.1 A MEMBER, or where relevant a DEPENDANT or NOMINEE, shall be entitled, at
       the option of the MEMBER, DEPENDANT or NOMINEE as the case may be, to
       elect that any benefit payable by the FUND which must, according to these rules,
       be applied for the provision of an annuity, be applied to provide an annuity
       purchased:
26.1.1 by the FUND in the name of the FUND from the INSURER for the payment of the
       annuity to the MEMBER, DEPENDANT or NOMINEE; or
26.1.2 in the name of the MEMBER, DEPENDANT or NOMINEE from a registered insurer
       chosen by the person entitled to the annuity for the payment of the annuity



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       directly to the MEMBER, DEPENDANT or NOMINEE, provided that such annuity
       shall comply with rules 20 and 25.
26.2 A MEMBER, DEPENDANT or NOMINEE, as the case may be, may select only one
       of the options in rule 26.1.1 and 26.1.2 and not both. Annuity options are limited
       to those in rules 26.1.1 and 26.1.2.
26.3 Where the MEMBER, DEPENDANT or NOMINEE elects the option set out in rule
       26.1.2, the FUND shall assist the MEMBER, DEPENDANT or NOMINEE with
       appropriate arrangements for the transfer of the capital amount of the benefits
       then due under the FUND to the registered insurer from whom the annuity has
       been purchased, and upon transfer of the said capital amount, the liability of the
       FUND hereunder to the MEMBER, DEPENDANT or NOMINEE shall cease.
26.3A Membership of the FUND shall cease if the annuity as contemplated in rule
        26.1.2 is purchased and the FUND has transferred the benefits to the registered
        insurer and, if applicable, any benefit has been paid to the MEMBER directly.
       Once the FUND has made payment to the registered insurer and, if applicable,
        has paid a benefit directly to the MEMBER, the FUND will have no further
        obligation towards the MEMBER.
26.4 All benefits payable in terms of these rules shall be payable by the relevant
       registered insurer directly to the persons entitled thereto.
26.5 The payment of annuities shall be subject to submission of proof to the
       satisfaction of the registered insurer of the age and survival of the MEMBER,
       DEPENDANT or NOMINEE concerned, provided that in the case of annuity
       installments payable for a minimum term, no proof of survival is required for
       payments to be made during the term concerned. In the case of a retirement
       annuity payable from the retirement date, and in the case of a disability annuity,
       the following shall apply:
26.5.1 During his lifetime, the MEMBER shall be entitled to the annuity.
26.5.2 After his death, the benefits (if any) shall be paid in accordance with the
       provisions of rule 27 if the annuity was purchased in the name of the FUND.
26.6 In the case of an annuity payable to a NOMINEE or DEPENDANT as the result of
       the death of the MEMBER before the retirement date, the following shall apply if
       the annuity was purchased in the name of the FUND:
26.6.1 During the lifetime of the NOMINEE or DEPENDANT on whose life the annuity
       was effected, the NOMINEE or DEPENDANT shall be entitled to the annuity.
26.6.2 If the annuity provides for continuance for a stated term after the death of the
       recipient, the NOMINEE or DEPENDANT of such person, if any, shall be entitled to
       such annuity.
26.7 If a portion of an annuity has been commuted by the MEMBER, the MEMBER
       shall be entitled to the commuted value.
26.8 If a cash amount is available on the death of a MEMBER, the NOMINEE or
       DEPENDANT shall be entitled to such cash amount.
26.9 If a commuted value of a portion of an annuity becomes payable to a NOMINEE
       or DEPENDANT after the death of the MEMBER before the annuity date, the
       NOMINEE or DEPENDANT shall be entitled to such commuted value.
26.10 A MEMBER may nominate the DEPENDANTS or any other person, institution, or
       body to whom payment of benefits shall be made after his death, but if he has
       no DEPENDANTS he may nominate any other person, institution or body, subject
       to the following:



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26.10.1 Nomination shall be made in writing in the manner prescribed by the BOARD
        from time to time.
26.10.2 Nominations may be revoked or varied in such manner as the BOARD may
        determine.

27.    Death benefits
27.1   Upon the death of a MEMBER the benefits provided in terms of the FINANCIAL
       PRODUCTS shall become payable by the INSURER or XPS the FUND as the case
       may be, subject to the submission of an official death certificate or other
       evidence of death satisfactory to the INSURER or XPS the FUND, proof of age as
       may be required by the INSURER or XPS the FUND, and in the case of benefits
       granted subject to proof of insurability, such further documents as the INSURER
       or XPS the FUND may deem necessary to consider the claim.
27.2 The benefits payable on the death of the MEMBER shall be paid as follows:
27.2.1 If the MEMBER leaves DEPENDANTS and has not designated a NOMINEE to
        receive the benefit or a portion of the benefit to the BOARD in writing, the
        benefit shall be paid to the DEPENDANTS in the proportion on which the BOARD
        decides.
27.2.2 If the MEMBER leaves DEPENDANTS and has also designated a NOMINEE to the
        BOARD in writing, prov ided that such nomination was made after 30 June 1989,
        the benefit (or such portion as is specified in writing to the BOARD) shall be paid,
        within 12 months of the death of the MEMBER, to the DEPENDANTS or NOMINEE
        in such proportions as the BOARD deems equitable.
27.2.3 If the BOARD does not become aware of or cannot trace any DEPENDANTS
       within 12 months of the death of the MEMBER, but a NOMINEE who is not a
       DEPENDANT has been designated in writing to the BOARD, the benefit (or such
       portion as is specified by the MEMBER in writing to the BOARD), after any debit
       balance in the estate of the deceased MEMBER has been extinguished, shall be
       paid to the NOMINEE.
27.2.4 If the BOARD does not become aware of or cannot trace any DEPENDANT of the
       MEMBER within 12 months of the death of the MEMBER and if the MEMBER has
       not designated a NOMINEE, or if the MEMBER has designated a NOMINEE to
       receive a portion of the benefit to the BOARD in writing, the benefit or the
       remaining portion of the benefit after payment to the designated NOMINEE, shall
       be paid into the estate of the MEMBER or, if no inventory in respect of the
       MEMBER has been received by the Master of the High Court, into the Guardian's
       Fund.
27.2.5 If the MEMBER had elected a joint and surv ivorship annuity on his and a specific
        DEPENDANT's life purchased in the name of the FUND and the MEMBER dies
        after the retirement date, then notwithstanding the aforegoing, the annuity shall
        be paid to the specific DEPENDANT in terms of the conditions of the annuity.
27.2.6 If the MEMBER had elected a single life annuity payable for a certain term
        purchased in the name of the FUND and the MEMBER dies after the retirement
        date but before the expiry of the certain term, the BOARD may at its sole
        discretion pay the cash value, as calculated by the relevant registered insurer, of
        the outstanding annuity instalments in one amount or utilise such cash value to
        purchase an annuity on the life of a DEPENDANT or NOMINEE for an amount
        which shall be determined by the registered insurer from whom the annuity is



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           purchased.




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27.3   Subject to the provisions of sub-rules 27.1 and 27.2 above but notwithstanding
        anything else to the contrary contained in these rules , the BOARD shall have the
        power to do any one or more of the following:
27.3.1 Determine whether there is a DEPENDANT, or DEPENDANTS, of the deceased
       MEMBER and if there is more than one DEPENDANT, whether the whole amount
       of the benefit shall be paid to one DEPENDANT or the proportion in which the
       benefit shall be paid to all or any of the DEPENDANTS and the manner in which
       the benefit shall be paid.
27.3.2 At its sole discretion pay all or a portion of the benefits due, to a Trust
       established by the MEMBER, with specific authority, inter alia, to receive the
       monies payable under these rules on his death and to administer such monies for
       the benefit of a DEPENDANT or DEPENDANTS of the MEMBER.
27.3.3 Appoint the XPS Beneficiaries’ Trust (Master Reference Number I TRUST
        4876/01) and such persons or institutions as it may deem fit to administer the
        monies or a portion of the monies payable for the benefit of all or any of the
        DEPENDANTS on such terms and conditions regarding administration, payment
        and ultimate disposal, as the BOARD may determine, provided that if for the
        purpose of this paragraph the BOARD incurs expenses, such expenses or part
        thereof may be deducted from the monies to be administered.

28.     Increased benefits
       Where any benefit provided by an insurance policy, other than an annuity
       instalment, is not paid to or applied on behalf of a MEMBER, DEPENDANT or
       NOMINEE on the date upon which the benefit becomes due in terms of these
       rules, the capital amount of the benefit will be increased from a date and at a
       rate from time to time determined by the Board. If the Insurance policy is
       supplied by the INSURER the date and rate of increase will be agreed upon by
       the BOARD and the INSURER.




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29.    Copies of documents
       Each MEMBER of the FUND shall upon request by such MEMBER be furnished
       with a copy of the rules of the FUND, a copy of the Annual Report of the BOARD
       on the FUND and the annual financial statements of the FUND.

30.    Amendments of the rules
       The BOARD shall have the right to amend these rules in the interests of the
       FUND and of its MEMBERS. All such amendments to the rules will be subject to
       the approval of the REGISTRAR and the Commissioner for the South African
       Revenue Service.

31.    Disputes
       In a dispute regarding the interpretation of the rules or the administration of the
       FUND, the complainant shall submit his complaint to the FUND in writing. Within
       thirty days of receipt of the complaint the FUND shall answer it in writing. If the
       complainant is not satisfied with the FUND's answer and the complaint is a
       complaint as described in the ACT, the complainant may lodge the complaint with
       the Pension Funds Adjudicator for adjudication in terms of the Act.

32.    Amalgamation
       The BOARD shall be entitled to amalgamate the business of the FUND with that
       of any other retirement annuity fund provided:
32.1   the other fund has objects similar to those of the FUND;
32.2   the benefits provided by the other fund are not less than those provided by the
       FUND;
32.3   a majority of MEMBERS agree thereto; and
32.4   the REGISTRAR and the Commissioner for the South African Revenue Service
       approve of the amalgamation.

33.    Winding-up
       The BOARD shall be entitled to wind up the FUND if empowered thereto by a
       majority of MEMBERS and subject to the approval of the Commissioner for the
       South African Revenue Service and the REGISTRAR. The BOARD shall appoint a
       liquidator, which appointment shall be subject to the approval of the REGISTRAR,
       and the period of liquidation shall be deemed to commence as from the date of
       such approval. Upon the winding-up of the FUND a MEMBER's interest therein
       shall either be used to purchase FINANCIAL PRODUCTS providing similar benefits
       (to the satisfaction of the Commissioner for the South African Revenue Service)
       and tax treatment to those provided by the FUND or be paid into another
       approved retirement annuity fund for the MEMBER's benefit.




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5 Section 4 – Example set of Rules for a Provident Fund


              An asterisk (*) means that the relevant rule has been changed.
                     See the back of the document for the revised rule.

      The Afrikaans version of the Rules has been registered at the Financial Services
               Board (FSB) and the South African Revenue Services (SARS)



                              Contact details for enquiries:




US 10394                      Pre Course / Reference Material                      75
                                      RULES

                                      OF THE

                                 MIDDLE POINT

           PROVIDENT FUND




                                                          Reference numbers:
                                                          XXXXXXXXXXXXXXXXXX




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                CONTENTS

    SUBJECT                                               PAGE

    NAME                                                         1
    TRUST                                                        1
    REGISTERED OFFICE                                            1
    DEFINITIONS                                                  1
    OBJECTS                                                      3
    OPERATION OF THE FUND                                        3
    PARTICIPATION                                                3
    TERMINATION OF MEMBERSHIP                                    4
    CONTRIBUTIONS                                                5
    PAYMENT TO THE INSURER AND NUMBER OF DAYS GRACE              6
    BENEFIT UPON RETIREMENT                                      6
    PAYMENT OF PENSION UPON RETIREMENT                           6
    DEATH BENEFITS                                               7
    PAYMENT OF PENSION UPON DEATH                                7
    DISABILITY BENEFITS                                          7
    WITHDRAWAL BENEFITS                                          8
    INCREASED BENEFITS                                           8
    TO WHOM BENEFITS ARE PAID                                    9
    PAYMENT UNDER SPECIAL CIRCUMSTANCES                          10
    INALIENABLE BENEFITS                                         11
    MONIES PAYABLE TO THE FUND AND THE EMPLOYER                  11
    MONETARY UNIT                                                12
    TRANSFERS FROM AND TO OTHER FUNDS                            12
    PROOF OF CLAIMS                                              12
    UNCLAIMED BENEFITS                                           13
    DIRECT PAYMENT OF BENEFITS BY INSURER                        13
    BOARD OF CONTROL                                             13
    MEETINGS                                                     13
    DUTIES OF THE BOARD                                          14
    PERSONAL LIABILITY                                           15
    INDEMNITY AGAINST LOSS                                       15
    EXPENSES BY BOARD MEMBERS                                    15




    PROVISION OF DATA                                            15


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    FINANCIAL YEAR AND AUDITOR                                              15
    BINDING POWER OF THE RULES                                              15
    JURISDICTION                                                            15
    INTERPRETATION OF RULES AND DISPUTES                                    16
    INSPECTION OF AND COPIES OF THE RULES                                   16
    DISSOLUTION OR PARTIAL DISSOLUTION OF THE FUND                          16
    AMENDMENT OF THE RULES                                                  17



    Name

    1.     A provident fund known as the "Middle Point Provident Fund‘ (the FUND) was
    founded with effect from 1 February 1989 by the following parties, viz. -
           Rip off Life Assurance Ltd on the one hand and
    W R Masson
    N R Smith
    WRMD Jöhnge
    J.J. van der Merve
           (the BOARD) on the other, with the object of providing benefits upon retirement
    or other life contingencies in terms of these RULES, as amended from time to time,
    in the interest of persons who qualify for participation in the FUND.
    Trust

    2.     The parties agree that these RULES constitute a trust between these persons
    and, in particular -
    Rip off Life Insurance Limited accepts the responsibilities impose on it in
    terms of the RULES; and
    the BOARD accepts their nomination with the powers and duties as set out in
    the RULES.
    Registered office
    The registered office of the FUND is Rip off Life Insurance Limited, 3 Stand Road,
    Bellville. Johannesburg.
    Definitions
    In these RULES, unless the context indicates otherwise:
    words defined in the ACT have the same meaning as ascribed to them in the ACT;
    and
    all words and expressions in the masculine form also include the feminine form: and
    the singular also includes the plural, and vice versa; and



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    ACT means the Pension Funds Act, 1956, as amended, and the regulations
    promulgated in terms of this ACT.
    BOARD means the Board of Control of the FUND.
    BOARD MEMBER means a member of the Board of Control of the FUND.
    DEPENDANT with regard to a MEMBER means –
    a person in respect of whom the MEMBER is legally liable for maintenance;
    2.     a person in respect of whom the MEMBER is not legally liable for maintenance,
    if such person –
               was, in the opinion of the BOARD, upon the death of the MEMBER in fact
             dependent on the MEMBER for maintenance;
             is the spouse of the MEMBER, including a party to a customary union
             according to Black law and custom or to a union recognised as a marriage
             under the tenets of any Asian religion;
             is a child of a MEMBER, including a child born after the death of the
             MEMBER, an adopted child and an illegitimate child;
         a person in respect of whom the MEMBER would have become legally liable for
                            maintenance, had the MEMBER not died.
    EMPLOYEES means those persons in full-time, permanent employ of the
    EMPLOYER, as well as those who were in the full-time permanent employ of the
    EMPLOYER and who still receives benefits in terms of the RULES.
    EMPLOYER means any EMPLOYER participating in the FUND and with regard to a
    MEMBER, EMPLOYER means that EMPLOYER who employs or was the last to
    employ the MEMBER.
    FUND means the Middle Point Provident Fund, and any reference to the FUND shall
       be interpreted as a reference to the FUND or the BOARD, depending on the
                                      circumstances.
    INCOME means that part of an EMPLOYEE‘S INCOME, which the EMPLOYER
    takes into account when calculating the contributions which the EMPLOYER makes
    to the FUND for the benefit of the EMPLOYEE.
    INDEPENDENT BOARD MEMBER means a BOARD MEMBER who is not:
    an EMPLOYER;
    an EMPLOYEE of the FUND or the INSURER;
    controlled by the FUND or the INSURER;
    in joint control of the FUND together with the INSURER and does not deliv er any



US 10394                        Pre Course / Reference Material                   79
    other services to the FUND or the INSURER.
    INSURER means the INSURER as determined from time to time by the BOARD who
    underwrites the liability of the FUND; initially, until legally superseded, it shall be Rip
    off Life Insurance Limited.
    MEMBER means any person who participates in the FUND in accordance with these
    RULES, and membership has a corresponding meaning.




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    RETIREMENT DATE means –
    the date on which the MEMBER actually retires from the service of the EMPLOYER;
    or
    in the case where a MEMBER is not in the employ of an EMPLOYER, a date on
    which the MEMBER decides, which must be on or after the MEMBER‘s fifty-fifth
    birthday, but before or on his seventieth birthday or the date upon which the
    INSURER pays disability benefits by virtue of clause 20 to the MEMBER.
    RULES mean the RULES contained herein, as amended from time to time in terms
    of their provisions.
    Objects
    The objects of the FUND are to provide benefits to:
            a MEMBER on his RETIREMENT DATE; or
            a MEMBER in respect of whom the INSURER pays out a disability claim in
            terms of a life policy on the MEMBER‘s life; or
            the DEPENDANTS, nominees or the estate of a deceased MEMBER.
    Operation of the Fund

            The FUND insures the benefits payable in terms of the RULES by taking out
            a policy with the INSURER on the life of each MEMBER. The MEMBER
            chooses the type of policy from a range, which the INSURER makes
            available to the FUND for this purpose and the MEMBER accepts the
            investment risk accompanying his choice. The monetary value of the
            MEMBER‘S benefits in terms of the FUND is equal to the value of the policy
            on his life.
            The FUND is the owner of any policy on the life of a MEMBER taken out by
            the FUND.
            The FUND is under no obligation to maintain the policies, except to the extent
            of the contributions received by the INSURER.
            The FUND may, with the approval of the MEMBER, sell any policy on the life
            of a MEMBER on his RETIREMENT DATE at a purchase price equal to its
            cash value.
    Participation

    At the start of its participation in the FUND, the EMPLOYER notifies the FUND in
    writing of the category or categories of EMPLOYEES determined by him for the



US 10394                       Pre Course / Reference Material                      81
    purpose of participation in the FUND, up to a maximum of five. Once he has started
    participating in the FUND, the EMPLOYER shall also notify the FUND in writing of
    any additional category or categories of EMPLOYEES determined for the purposes
    of participation in the FUND, if he has not yet determined five categories, provided
    that an EMPLOYER may never determine more than a total of five categories.
    Participation in the FUND is limited to EMPLOYEES who:
    earn INCOME equal to or more than the lowest INCOME on the table referred to in
    clause 13.1; and
    fall in any of the categories determined by the EMPLOYER for the purposes of
    participation in the FUND.
    An EMPLOYEE who qualifies for participation in the FUND in terms of clause 8 and
    who was employed by the EMPLOYER before the date on which the EMPLOYER
    commenced participation in the FUND and who has since been in the uninterrupted
    employ of the EMPLOYER, may commence participation in the FUND not later than
    12 months after the date on which the EMPLOYER commenced participation in the
    FUND, by applying to the FUND through the EMPLOYER.
    An EMPLOYEE employed by the EMPLOYER on or after the date on which the
    EMPLOYER commenced participation in the FUND, shall automatically participate in
    the FUND as soon as he enters the service of the EMPLOYER, and provided that he
    qualifies for participation in the FUND in terms of clause 8.
    Should the FUND apply for life or disability cover on the life of an EMPLOYEE, the
    life or disability cover is deferred until the EMPLOYEE complies with the INSURER‘S
    requirements in this regard.
    Termination of membership
           A MEMBER‘S participation in the FUND may not be terminated while he
           remains an EMPLOYEE, except in the case where the FUND dissolves with
           regard to the EMPLOYER.
           A MEMBER‘S participation in the FUND will be terminated -
                       upon the death of the MEMBER; or
                       as soon as the MEMBER, once he has ceased being an
                       EMPLOYEE, is no longer, in terms of the RULES, entitled to a
                       benefit; or
                       if a pension as intended in clause 16.1 is purchased and the FUND
                       transfers the benefits to the registered insurer and has paid the


US 10394                             Pre Course / Reference Material               82
                     balance of any benefits in cash directly to the MEMBER, if
                     applicable; or
                     when the FUND is dissolved, whichever takes place first.
    12. When a MEMBER becomes a partner in a firm that is an EMPLOYER and with
    whom he has, up to that stage, been an EMPLOYEE, he may remain a MEMBER
    while he is a partner as though he is in the full time employ of the EMPLOYER, but
    contributions to and benefits from the FUND shall be calculated based on his last
    INCOME before becoming a partner.
    Contributions

    13.1 The EMPLOYER shall make ongoing contributions to the FUND in respect of
    each of its EMPLOYEES who is a MEMBER of the FUND until the RETIREMENT
    DATE of such a MEMBER.            The FUND makes a table of income bands with
    corresponding contribution bands available to participating EMPLOYERS. An
    EMPLOYER selects the current contribution he will make to th e FUND in respect of
    each MEMBER from this table. The EMPLOYER may amend the contribution in
    respect of a MEMBER when the MEMBER‘S INCOME changes.
            The EMPLOYER may cease contributions to the FUND with regard to a
    MEMBER provided –
    the MEMBER‘S INCOME is reduced to an amount lower than the lowest INCOME
    appearing on the table made available by the FUND; or
    the MEMBER does not fall within one of the categories determined by the
    EMPLOYER for the purposes of participation in the FUND any more; or
    the MEMBER is absent from the service of the EMPLOYER and is not compensated
    in full while he is thus absent from service, provided that the EMPLOYER will resume
    contributions to the FUND as soon as the MEMBER returns to the service of the
    EMPLOYER and is compensated in full.
    The EMPLOYER may cease contributions to the FUND with regard to all MEMBERS
    in his service should he inform the FUND and the MEMBERS concerned provided
    that:
    no new EMPLOYEES of the EMPLOYER are admitted as MEMBERS from the date
    that the EMPLOYER ceases contributions; and
    each MEMBER concerned remains a MEMBER of the FUND until his RETIREMENT
    DATE.
    13.2 The EMPLOYER can make arrear contributions to the FUND in respect of a


US 10394                       Pre Course / Reference Material                    83
    MEMBER for any period before the MEMBER‘S membership commences. The past
    period for which the arrear contribution is made, is calculated according to the
    following formula at the MEMBER‘s retirement or death:
         A
                           Y = B x C - C, where
    Y = the period of past service to be calculated;
            A = the total contributions to the FUND in respect of the MEMBER in terms
            of clause 13.1 and this clause;
            B = the current contributions to the FUND in respect of the MEMBER in
            terms of clause 13.1;
            C = the years of contributing membership at retirement or death.




US 10394                     Pre Course / Reference Material                    84
    13.3 All contributions are to be paid monthly in advance. However, the FUND and
    the EMPLOYER may come to an agreement that contributions may be paid at longer
    intervals.
    13.4 The EMPLOYER shall inform the FUND in writing at the commencement of his
    participation in the FUND of the current contributions determined in respect of each
    MEMBER for the purposes of clause 13.1. The EMPLOYER shall also inform the
    FUND in writing of the current contributions determined for the purposes of clause
    13.1 in respect of any additional category of MEMBERS created after the
    commencement of his participation in the FUND.
    Payment to the insurer and number of days grace
    14. The FUND shall make arrangements with the EMPLOYER for the payment of
    the contributions by the EMPLOYER directly to the INSURER within the days of
    grace referred to in clause 15.
    15. The EMPLOYER is granted seven days‘ grace for the payment of contributions.
    Benefit upon retirement

             A MEMBER‘S retirement benefit is a pension purchased with the value of the
             policy, which the FUND holds in respect of the MEMBER. By applying to the
             FUND before becoming eligible for the pension, the MEMBER may convert a
             part of the pension or the full pension to a lump sum benefit.
                 Should the benefit which, in terms of the RULES, becomes payable in
             respect of a MEMBER on his RETIREMENT DATE be less than or equal to
             the maximum pension which may be commuted in terms of the definition of
             ‗pension fund‘ in the Income Tax Act, 1962, as amended, such benefit is paid
             to the MEMBER as a lump sum, unless the MEMBER prefers the payment of
             a pension and the FUND approves this arrangement.
             The FUND shall, at the request of the MEMBER, cede the policy to him in lieu
             of a lump sum payment.
    Payment of pension upon retirement

    17.1 The above-mentioned pension is bought from a registered insurer of the
    MEMBER‘S choice, with the MEMBER as the owner of the pension.
           The FUND‘S liability is limited to the conclusion of a contract with the insurer
    concerned in terms of which the insurer, upon receipt of payment by the FUND for
    the benefit of the MEMBER, will accept the MEMBER‘S application for a pension
    which is paid directly to him.


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           As soon as the FUND makes a payment to the insurer and the balance of any
    benefit is paid directly to the MEMBER, if applicable, the FUND no longer has any
    obligation to the MEMBER.
    17.2 More than one pension may be purchased on behalf of the MEMBER, within
    the limits set by the South African Revenue Service.
    17.3 A MEMBER‘S pension is payable at least until the death of the MEMBER.
    Death benefits

            Should a MEMBER die before becoming entitled to a retirement benefit, a
            pension is purchased for his DEPENDANTS and/or nominees as stipulated in
            accordance with clause 25 with the value of the policy held by the FUND in
            respect of the MEMBER. By applying to the FUND before the first payment is
            made, the pension of any one or more DEPENDANTS and/or nominees may
            be converted to a lump sum payment.
            Should the benefit which becomes available in respect of a specific
            DEPENDANT or nominee be less than or equal to the maximum pension
            which may be commuted fully in the case of a MEMBER in terms of the
            definition of ‗pension fund‘ in the Income Tax Act, 1962, as amended, such
            benefit is paid to that DEPENDANT or nominee in a lump sum, unless the
            DEPENDANT or nominee prefers the payment of a pension and the FUND
            approves this arrangement.
    Payment of pension upon death

            The above-mentioned pension is purchased from a registered insurer of the
            DEPENDANT‘S or nominee‘s choice with the DEPENDANT or nominee as
            the owner of the pension.
            The FUND‘S liability is limited to the conclusion of a contract with the insurer
            concerned in terms of which the insurer, upon receipt of payment by the
            FUND for the benefit of the DEPENDANT or nominee, shall accept an
            application by the person entitled to the pension for a pension to be paid
            directly to him.
    As soon as the FUND makes a payment to the insurer and the balance of any benefit
    has been paid in cash directly to the DEPENDANT or nominee, the FUND has no
    further obligation to the DEPENDANT or nominee.
            More than one pension may be purchased on behalf of an individual, within
            the limits set by the South African Revenue Service.


US 10394                       Pre Course / Reference Material                        86
    Disability benefits
    Should the INSURER grant a disability claim in terms of the policy on a MEMBER‘S
    life, the benefits are paid to the MEMBER.




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    Withdrawal benefits
    Should a MEMBER‘S service with an EMPLOYER be terminated before the
    RETIREMENT DATE and such termination not be regarded as RETIREMENT, the
    FUND shall, as may be deemed appropriate by the EMPLOYER, after consultation
    with the MEMBER -
           pay the MEMBER the value of the policies which the FUND holds on the life
           of the MEMBER; or
           cede such policies to the MEMBER; or
           transfer the value of such policies on behalf of the MEMBER to another fund
           which the EMPLOYER approves for this purpose; or
           have such policies made paid-up and on his RETIREMENT DATE pay the
           MEMBER a retirement benefit equal to the value of the policies at that stage.
    If a MEMBER who on his RETIREMENT DATE would have been entitled to a
    retirement benefit, die before reaching his RETIREMENT DATE, the value of the
    paid-up policies held in respect of him, shall be paid to his dependants or nominees.
    Increased benefits

    If a benefit is not paid by the FUND to, or applied for the benefit of the MEMBER,
    DEPENDENT or nominee on the date on which it should in terms of these RULES
    and the practice of the INSURER be paid or applied, the following will apply:
           the FUND will pay interest to the MEMBER, DEPENDANT or nominee in
           respect of the amount commuted by the party concerned into a lump sum;
           if the pension of a MEMBER, DEPENDANT or nominee is purchased from
           the INSURER, the pension will be put into operation retrospectively from the
           date on which it should have become operative in terms of these RULES, and
           all instalments in arrears will be paid to the party concerned together with the
           first recurring instalment;
           if the pension of a MEMBER, DEPENDANT or nominee is purchased at
           another insurer than the INSURER, the benefit will increase from a date and
           at a rate as is the practice of the INSURER from time to time and the FUND
           transfers the increased amount to the insurer concerned.
           Interest in 23.1 will be paid from a date and at a rate as is the practice of the
           INSURER from time to time.




US 10394                       Pre Course / Reference Material                        88
    To whom benefits are paid

    Subject to the regulations stipulated by the FUND, a MEMBER may appoint a
    nominee in writing (and cancel such nomination in writing) to receive the benefits
    upon his death. The appointment of a nominee (or the cancellation of the
    nomination) must be in the possession of the INSURER before the death of the
    MEMBER.
    The benefit payable in the case of the death of the MEMBER before the
    RETIREMENT DATE, must be paid as follows:
           If the FUND within twelve months of the death of the MEMBER, becomes
           aware of DEPENDANTS of the MEMBER, or trace DEPENDANTS of the
           MEMBER, and the MEMBER had not appointed a nominee, the benefit is
           paid to one of such DEPENDANTS or to some or all such DEPENDANTS, in
           the proportions deemed equitable by the BOARD.
           If the FUND does not become aware of or cannot trace any DEPENDANT of
           the MEMBER within twelve months of the death of the MEMBER, and the
           MEMBER has designated in writing to the FUND a nominee who is not a
           DEPENDANT of the MEMBER, to receive the benefit or such portion of the
           benefit as is specified by the MEMBER in writing to the FUND, the benefit or
           such portion of the benefit shall be paid to such nominee. Provided that
           where the aggregate amount of the debts in the estate of the MEMBER
           exceeds the aggregate amount of the assets in his estate, so much of the
           benefit as is equal to the difference between such aggregate amount of debts
           and such aggregate amount of assets shall be paid into the estate and the
           balance of such benefit or the balance of such portion of the benefit as
           specified by the MEMBER in writing to the FUND shall be paid to the
           nominee.
           If a MEMBER has a DEPENDANT and the MEMBER has also designated in
           writing to the FUND a nominee to receive the benefit or such portion of the
           benefit as is specified by the MEMBER in writing to the FUND, the FUND
           shall within twelve months of the death of such MEMBER pay the benefit or
           such portion thereof to such DEPENDANT or nominee in such proportions as
           the BOARD may deem equitable. Provided that this sub-clause shall only
           apply to the designation of a nominee made on or after 30 June 1989.
           Provided further that, in respect of a designation made on or after the said
           date, this sub-clause shall not prohibit the FUND from paying the benefit,


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           either to a DEPENDANT or nominee contemplated in this clause or, if there is
           more than one such DEPENDANT or nominee, in proportions to any or all of
           those DEPENDANTS and nominees.




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            If the FUND does not become aware of or cannot trace any DEPENDANT of
            the MEMBER within twelve months of the death of the MEMBER and if the
            MEMBER has not designated a nominee or if the MEMBER has designated a
            nominee to receive a portion of the benefit in writing to the FUND, the benefit
            or the remaining portion of the benefit after payment to the designated
            nominee, shall be paid into the estate of the MEMBER or, if no inventory in
            respect of the MEMBER has been received by the Master of the Supreme
            Court in terms of section 9 of the Estate Act, 1965 into the Guardian‘s Fund.
            A payment by the FUND to a trustee contemplated in the Trust Property
            Control Act, 1988 for the benefit of a DEPENDANT or nominee contemplated
            in this clause 25 shall be deemed to be a payment to such DEPENDANT or
            nominee.
            Any benefit dealt with in terms of this clause 25, payable to a minor
            DEPENDANT or minor nominee, may be paid in more than one payment in
            such amounts as the BOARD may from time to time consider appropriate and
            in the best interest of such DEPENDANT or nominee. Provided that interest
            at a reasonable rate, having regard to the investment return earned by the
            FUND, shall be added to the outstanding balance at such times as the
            BOARD may determine. Provided further that any balance owing to such a
            DEPENDANT or nominee at the date on which he or she attains majority or
            dies, whichever occurs first, shall be paid in full.
    Any payment which must be made to a person in terms of the RULES, may be done
    for the benefit of such a person to a guardian or curator, in accordance with
    conditions as laid down by the FUND, and such payments shall relieve the FUND of
    any further obligation with regard tot such a person.
    The FUND may at any time change its decision to make a payment to a specific
    person, and should a person, other than a MEMBER to whom payment is made in
    terms of the RULES, die before the payment of the benefit to him is completed, the
    FUND may, in its discretion, pay the benefit to the estate of such person or to
    another DEPENDANT or nominee.
    Payment under special circumstances

    Should the BOARD, for sound and sufficient reasons, decide that it is not desirable
    to pay a benefit in the manner stipulated elsewhere in these RULES, the BOARD
    may, in its discretion, pay it as follows:



US 10394                         Pre Course / Reference Material                     91
           in instalments to the MEMBER concerned, or
           in full or partially to his DEPENDANTS and nominees, or
           to trustees in favour of the MEMBER or his DEPENDANTS and nominees, or
           in such a manner as the BOARD may determine to the benefit of the
           MEMBER or his DEPENDANTS and nominees.
           Any decision by the BOARD in terms of this clause may be amended from
           time to time at its discretion.
    Inalienable benefits

    Save to the extend permitted by the RULES, the Income Tax Act, 1962, as
    amended, and the Maintenance Act, 1998, as amended, no benefit provided for in
    the RULES (including a pension which the FUND has purchased or shall purchase
    from an insurer for a MEMBER), or the right to such a benefit, or the right in respect
    of contributions made by or on behalf of a MEMBER, may be reduced, transferred or
    otherwise be ceded or pledged or hypothecated or be liable to be attached or
    subjected to any form of execution under a judgement or order of a court of law, or to
    the extent of no more than three thousand rand per annum, be taken into account in
    determining the financial position of a judgment debtor in terms of section 65 of the
    Magistrates‘ Court Act, 1944, as amended, and should the MEMBER concerned or
    beneficiary attempt to transfer or otherwise cede or pledge or dispose of such benefit
    or right, the FUND may withhold or suspend the payment thereof. Provided that the
    FUND may pay any such benefit or any benefit as a result of such contributions or
    part thereof to one or more of the MEMBER‘S or beneficiary‘s DEPENDANTS or to a
    guardian or curator for the benefit of such DEPENDANTS during such a period of
    time as may be determined by the FUND.
    Should the estate of any person entitled to a benefit payable in terms of the RULES
    (including a pension purchased by the FUND from an INSURER for that person) be
    sequestrated or surrendered, such benefit will, subject to clause 32, not be deemed
    to form part of the assets in the insolvent estate of that person and it may not be
    attached or appropriated by the curator of his insolvent estate or by his creditors in
    any way.
    Subject to clause 32, a benefit payable by the FUND with regard to a deceased
    MEMBER shall not form part of the assets in the estate of such a MEMBER.
    Monies payable to the Fund and the employer

    The FUND may recover the following amounts from the benefits payable in terms of


US 10394                        Pre Course / Reference Material                     92
    the RULES and, where applicable, transfer it to the EMPLOYER:
    32.1 any amount payable to the EMPLOYER by the MEMBER with regard to a loan
    granted to the MEMBER to enable him to -
                   redeem a loan granted to him by a person or organisation other than
                   the EMPLOYER against security of fixed property belonging to the
                   MEMBER or his spouse and where a residence has been or will be
                   erected which is or will be occupied by the MEMBER, or a
                   DEPENDANT of the MEMBER, whichever the case may be; or
                   purchase a residence, or to purchase land and to erect a residence
                   to be occupied by the MEMBER or a DEPENDANT of the
                   MEMBER; or
                   to extend or effect improvements to a residence, or to repair or
                   maintain a residence belonging to the MEMBER or his spouse and
                   which is or will be occupied by the MEMBER or a DEPENDANT of
                   the MEMBER;
           any amount payable by the MEMBER to the EMPLOYER with regard to an
           amount for which the EMPLOYER is responsible in terms of a guarantee
           provided with regard to a loan by any other person or organisation to the
           MEMBER for any purpose referred to in clauses 32.1.1 to 32.1.3;
           the amount of damage suffered by the EMPLOYER as a result of any theft,
           dishonesty, fraud or misconduct by the MEMBER and which the MEMBER
           had admitted to the EMPLOYER in writing or a court order had been obtained
           against the MEMBER;
           any amount which the FUND has paid or will pay according to an agreement
           with a MEMBER or beneficiary with regard to -
                   the MEMBER‘S or beneficiary‘s subscription to a medical aid
                   scheme registered other than provisionally in terms of the Medical
                   Schemes Act, 1998, as amended; or
                   any insurance premium payable by such MEMBER or beneficiary to
                   an insurer registered in terms of the Long-term Insurance Act, 1998,
                   as amended, or the Short-term Insurance Act, 1998, as amended;
                   or
                   any purpose approved by the Registrar of Pension Funds, on the
                   conditions laid down by him, upon a request in writing from the


US 10394                     Pre Course / Reference Material                     93
                      FUND.
    Monetary unit

    33. All amounts payable to or by the FUND in terms of the RULES, shall be payable
    in the legal tender of the Republic of South Africa.
    Transfers from or to other funds

    34. The FUND may, in consultation with other funds, receive benefits from or
    transfer benefits to those funds, upon conditions determined be the FUND.
    Proof of claims

    35. The FUND is not compelled to grant any benefit unless it is satisfied with regard
    to the MEMBER‘S age and with regard to any other circumstances which may be
    regarded as relevant for the payment of the benefit and for which it requires proof or
    information.




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    Unclaimed benefits

    Unclaimed benefits are preserved by the FUND until these are claimed and should
    any legislation be promulgated which prescribes how unclaimed benefits should be
    dealt with, the FUND shall deal with it accordingly.
    Direct payment of benefits by Insurer
    The BOARD shall see to it that the INSURER pays the benefits payable in terms of
    the policies directly to the MEMBERS or DEPENDANTS or nominees, as determined
    by the BOARD.
    Board of control

           The FUND is controlled and managed by a BOARD which binds the FUND
           with regard to all the matters concerning the FUND and which has all the
           powers necessary to achieve the objectives of the FUND.
           The BOARD consists of at least four members, of whom at least one shall be
           an INDEPENDENT BOARD MEMBER.
           The INSURER nominates all the BOARD MEMBERS.
           Should a BOARD MEMBER find it temporarily impossible to fulfil his duties as
           BOARD MEMBER, the other BOARD MEMBERS shall appoint a temporary
           BOARD MEMBER to fulfill his duties temporarily.
           A BOARD MEMBER automatically vacates his position if and when he:
                     resigns his position through written notice to the BOARD; or
                     is unfit to be the director of a company in terms of the provisions of
                     the Companies Act, 1973, as amended; or
                     is found to be insane, or is or becomes insane; or
                     is placed under curatorship by order of a competent court; or
                     does not attend three consecutive meetings without permission of
                     the BOARD; or
                     has served five years in the position. Such a person may be re-
                     nominated as a member of the BOARD should he make himself
                     available and is otherwise qualified to serve as BOARD MEMBER.
    Meetings
    39.1 Proper notice of an ordinary meeting of the BOARD shall be given at least 15
    days before the meeting by the chairman or the principal officer to all BOARD
    MEMBERS. Should all the BOARD MEMBERS agree, a shorter period of notice shall



US 10394                       Pre Course / Reference Material                       95
    be in order.




US 10394           Pre Course / Reference Material   96
    At the first meeting of a particular year the BOARD elects a chairman and deputy
    chairman amongst themselves who shall serve in that capacity until the first meeting
    of the following year.
           A quorum for a meeting of the BOARD shall be four members, which shall
           always include the INDEPENDENT BOARD MEMBER. The decision of the
           majority shall be final and binding at all meetings and, in the case of an even
           total of votes, the chairman shall have an ordinary as well as a casting vote.
           In the case of the chairman being absent at any meeting, the deputy
           chairman shall act as chairman.
           The chairman may, when he deems it necessary, call a meeting of the
           BOARD.
           Any member of the BOARD may ask the chairman to call a meeting of the
           BOARD to deal with matters as set out in the request. Should the chairman
           regard the request as reasonable, he shall call the meeting as soon as
           possible, but in any case no more than thirty days after the date of receipt of
           the request, provided that, should the request be supported by the majority of
           the members of the BOARD, they may call a meeting themselves and, should
           a quorum be present, the decision of the majority shall be binding.
           A decision in writing signed by all the BOARD MEMBERS, or a decision sent
           by electronic mail to all the BOARD MEMBERS and ratified by them, is as
          binding as a decision taken at a meeting of the BOARD.
    Duties of the Board
    The duties of the BOARD are as follows:
           to conclude a written agreement with the INSURER in terms of which the
           INSURER shall handle the administration, investments and actuarial services
           on behalf of the FUND;
           to apply to the INSURER for the issuing of policies in favour of the FUND on
           the lives of the MEMBERS;
           to act on behalf of the MEMBERS in all negotiations with the INSURER with
           regard to the FUND and in connection with the policies;
           to appoint a liquidator, subject to the approval of the Registrar of Pension
           Funds, when necessary;
           to manage and control the FUND in accordance with the legal provisions in
           general in order to achieve the objectives of the FUND;



US 10394                      Pre Course / Reference Material                       97
           to execute any contract or other document on behalf of the FUND;
           to consult with the INSURER and draw up guidelines according to which the
           FUND may accept benefits from other funds or the FUND may transfer
           benefits to other funds.
    The BOARD may delegate any of their aforementioned duties.
    Personal liability

    42. The BOARD MEMBERS and their proxies shall not be personally liable for any
    loss suffered by the EMPLOYER, MEMBERS or their DEPENDANTS and nominees
    as a result of the actions of the BOARD MEMBERS and their proxies, provided that
    the actions arose in accordance with the provisions of the RULES and the loss did
    not arise due to their negligence, dishonesty or fraud.
    Indemnity against loss

    43. The BOARD shall find ways to protect the FUND against loss due to negligence,
    fraud or dishonesty on the part of anyone receiving or keeping monies of the FUND.
    Expenses by Board Members
    44. All expenses incurred by BOARD MEMBERS with regard to the control and
    management of the FUND shall be paid by the INSURER.
    No remuneration is payable by the INSURER to the BOARD MEMBERS, except the
    INDEPENDENT BOARD MEMBER, for services rendered to the FUND in their
    capacity as BOARD MEMBERS. The BOARD in consultation with the INSURER
    shall, from time to time, decide on fair remuneration for the INDEPENDENT BOARD
    MEMBER.
    Provision of data

    The EMPLOYER shall supply the BOARD with details concerning MEMBERS with
    regard to their benefits from the FUND or their claim thereto and the BOARD may,
    on the basis of certain details, act without making any further enquiries.
    Financial year and auditor
    The financial year runs from 1 January to 31 December.
    The INSURER‘S auditor shall be the auditor for the FUND.
    Binding power of the Rules

    The RULES are binding for the EMPLOYER, the MEMBERS, the FUND and its
    officials and anyone instituting a claim in terms of the RULES or whose claim arises
    from these.



US 10394                       Pre Course / Reference Material                    98
    Jurisdiction
    The FUND is a separate body and body corporate, separate from its MEMBERS,
    and is the legal owner of its goods and has the jurisdiction to accept rights and
    obligations in its own name and to act as claimant and defendant in legal actions.
    The BOARD and its proxies handle all legal actions for and on behalf of the FUND.




US 10394                      Pre Course / Reference Material                     99
    Interpretation of Rules and disputes
    In a dispute with regard to the interpretation of the RULES or the administration of
    the FUND, the complainant shall submit his complaint to the FUND in writing. The
    FUND shall reply in writing within thirty days after receipt of the complaint. Should
    the complainant not be satisfied with the reply by the FUND and the complaint is a
    complaint as defined in the ACT, the complainant may submit the complaint to the
    Pension Funds Adjudicator.
    Inspection and copies of the Rules

    The RULES of the FUND are open to inspection at the registered office of the FUND
    for EMPLOYERS and MEMBERS at any reasonable time and they may obtain
    copies of the RULES at a fee as determined by the INSURER.
    Dissolution or partial dissolution of the Fund

    The BOARD may, in consultation with the INSURER, close the FUND for new
    MEMBERS or dissolve the FUND.
    The FUND is dissolved with regard to an EMPLOYER and the MEMBERS in his
    service should the EMPLOYER inform the FUND and the MEMBERS concerned of
    his intention.
                 The FUND terminates the policies on the life of the EMPLOYEES
    concerned on the date upon which the FUND received notification of the
    EMPLOYER or on a future date requested by the EMPLOYER.
                 From the date that the policies are terminated until the date that the
    proceeds thereof are paid to the liquidator, the INSURER pays interest thereon at a
    rate as is its practice from time to time.
    Should the FUND be dissolved in its entirety or should the FUND be dissolved with
    regard to a specific EMPLOYER, the FUND or, where applicable, the liquidator
    appointed by the BOARD, shall, in accordance with the EMPLOYER concerned,
    either -
               pay the cash value of the policies held by the FUND in accordance with
               the RULES to the MEMBERS, or transfer it on behalf of the MEMBERS to
               another fund approved by the BOARD for this purpose; or
               have the policies on the lives of all MEMBERS concerned been made
               paid-up and pay a MEMBER on his RETIREMENT DATE a retirement
               benefit equal to the value of the policy on his life at that point in time.




US 10394                         Pre Course / Reference Material                   100
    Should there be a reorganisation, transfer or merger with regard to a specific
    EMPLOYER’S business, the FUND shall, in consultation with the new
    EMPLOYER, decide whether the FUND should continue in the same or in a
    different format with regard to the new EMPLOYER or whether the FUND
    should be dissolved partially.
             Should the FUND be dissolved with regard to an EMPLOYER under
             circumstances where the benefits of all MEMBERS affected by the
             dissolution are not transferred to another fund in terms of section 14 of the
             ACT or, should the FUND be dissolved in its entirety, the BOARD shall
             appoint a liquidator, which appointment shall be subject to approval by the
             Registrar of Pension Funds and the period of liquidation shall be regarded as
             commencing on the date of such approval.
             During such liquidation the provisions of the ACT shall still be applicable to
             the FUND as though the liquidator is the BOARD.
             The liquidator shall submit the provisional accounts prescribed by regulation
             to the Registrar of Pension Funds as soon as possible, signed and certified
             as correct by him, which show the assets and liabilities of the FUND at the
             commencement of liquidation and the proposed manner to realise the assets
             and to honour obligations, including any obligations and conditional
             obligations to or in respect of MEMBERS.
    When the responsibilities and conditional responsibilities to or in respect of
    MEMBERS are discharged, full recognition shall be given to the following -
    the rights and reasonable benefit expectations of the persons concerned;
    additional benefits, the payment of which by the FUND has become an accepted
    practice if any.
    Amendment of the Rules

    57. The BOARD, in consultation with the INSURER, may amend the RULES at any
           time, if the amendments are submitted to the Registrar of Pension Funds and
           the Commissioner of the South African Revenue Service for approval.




US 10394                        Pre Course / Reference Material                      101
           Sunday     Times:      September          27,     2003   By   Bruce   Cameron

           Retirement fund choices can be confusing. This week we explain how defined
           contribution provident funds work and how they compare with other
           retirement fund choices.


           A defined contribution provident fund is similar to a defined contribution
           pension fund in that the contributions you and your employer make to the
           fund are set down, or defined, in your employment contract, and by the rules
           of the fund.


           On the other hand, a defined contribution provident fund differs from a
           defined benefit pension fund in that the size of the benefit paid to you when
           you retire are not guaranteed.


           Your employer guarantees to make a contribution to your provident fund, but
           does not guarantee you a pension.


           If the investments made with your retirement fund savings perform poorly,
           you carry this loss. If they perform well, you pick up the benefit.

           The big difference between a provident fund and a pension fund lies in the
           taxation. You cannot deduct your contributions against tax every year, but
           you can take your entire retirement savings as a lump sum when you retire.

           You are not required to buy a monthly pension with the money.

           Your contributions to the fund are also not taxed at retirement, but
           contributions made by your employer will be taxed.


           How much does it cost?


           The contributions to the fund, both by your employer and yourself, are fixed
           when you join the fund, or when you start employment.

           The contributions of both yourself and your employer are calculated as a
           percentage of your pensionable salary, which normally excludes allowances,
           such as those for motor vehicles. While the percentage is constant, the size
           of contributions increases as your basic salary increases.


           The ratios between what you and your employer contribute can vary.

           With a provident fund your employer will normally, but not always, make the
           entire contribution. This is because your employer, not you, can claim the


US 10394                       Pre Course / Reference Material                     102
           contributions as a tax deduction, but this means the portion of the amount
           you receive at retirement that came from your employer is taxable.

           How your pension is calculated

           A record is kept of exactly how much you and your employer have paid into
           the fund, as well as the capital and income growth of the investment from the
           contributions.


           When you retire you can take the entire benefit in cash.


           At retirement, your tax-free portion is calculated in the same way as for a
           defined contribution pension fund, but you can claim your own contributions,
           with a minimum of R24 000 as a deduction.


           Further tax may be levied on any income generated from your investment,
           depending on how the income was generated, and your employer's
           contributions.

           Unlike a defined benefit scheme, you cannot predict what your pension will
           be, as you cannot predict how much capital you will have when you retire.

           Because you have to take the investment risk, you are normally given at least
           two investment choices.


           The usual ones are:

            Guaranteed: Here your capital is guaranteed, as well as some growth. You
           get additional growth by way of annual bonuses, which are based on the
           market performance of the underlying investments. Bonuses come in two
           forms: vesting (which cannot be taken away once given); and non-vesting
           (which can be taken away if the life assurance company giving the
           guarantees has an extremely bad time in investing);
            Market-linked: Here your retirement fund savings are worth exactly the
           same as the underlying investments. If the value of the underlying
           investments goes up by 40 percent, so will your retirement savings. But if
           there is a market crash, your retirement savings will diminish in value.

           Market-linked investments also come with choices. The main market-linked
           option is one where you have no say in the investments. The fund trustees
           hand over the money to an asset manager with instructions about how they
           would like to see the money invested.

           However, members are increasingly being offered "umbrella" investments,
           which give you the choice as to what particular instruments to invest in
           (mainly unit trust funds). This, however, pushes up costs and exposes you to
           the risk of making the wrong decisions unless you have the time and


US 10394                      Pre Course / Reference Material                     103
           expertise, this is an option best avoided

           An example of payment on retirement:

           Length of service: 30 years
           Your total contributions: R200 000
           Plus employer's contributions: R200 000
           Plus income and capital growth: R600 000
           Pre-tax total: R1 000 000
           (Tax is ignored in this calculation)

           If you have been in a market-linked fund, it is normally best to switch to a
           guaranteed fund if markets are high and you are nearing retirement.

           When you retire you if you do not want to take the lump sum and want to
           receive a monthly pension, you can buy a voluntary annuity. This can be
           structured in a number of ways, including in such a way as to give you an
           increase each year to take account of inflation, or in a way that will ensure
           that the pension is paid to your spouse after you die.

           However, a guaranteed annuity in which you are guaranteed a pension for life
           can also have a downside. This is because these annuities are based on
           interest rates. If long-term interest rates are high, you will receive a better
           pension; but if interest rates are low, then your pension will also be lower.

           In making the decision on where to buy an annuity, and in cases where a
           pension is bought for you individually from a life assurance company, you
           should ask your fund to provide quotations from various firms.

           Advantages of defined contribution provident funds
            you may get a higher pension than you would have received from a defined
           benefit retirement fund as a result of good investment performance;
            at retirement you can invest the entire lump sum benefit as you see fit,
           giving you greater choices. You can buy an annuity of your choice and from
           any company you like, set up a post-retirement business and invest in a wider
           range of investments. In other words, you can control your investments
           yourself;
            If you live in a remote area with little infrastructure or where it is difficult to
           receive pension payments, a lump sum can be preferable; and
            as with a defined contribution pension fund, you have a greater say in the
           investments of contributions during your working life. However, here again,
           you need to be cautious about how you decide on the option most suitable for
           you.

           Disadvantages of defined contribution provident funds
            the risk of having insufficient money to see you through retirement is yours.
           This risk is greatest with a provident fund.


           Not only do you have the risk in the build-up of the fund, where investment



US 10394                        Pre Course / Reference Material                          104
            returns will determine what you will receive at retirement, but you also need
            to make your money last you through retirement.


            If it is poorly invested, you may find yourself destitute, particularly if you live
            for a long time. It is impossible for you to know how long your natural life will
            be, making it very difficult to decide how much money you will need for the
            rest of your life.


            Therefore, it is best to use at least part of the money to purchase a pension,
            so that you are at least assured of a certain income until you die;

             your contributions are not tax deductible;
             your family may not receive much if you die young, or if you have to take
            early retirement because of ill health, particularly when you are younger.

            The reason for this is that you or your family will receive a pension based on
            your accumulated retirement savings at that point.


            However, group life and disability benefits are normally better than for a
            defined benefit scheme. You need to take into account the structure of group
            life benefits. If there is a shortfall, particularly when you are younger, you may
            need to buy additional personal disability and life assurance for a limited
            period; and

             Aids could have a significant impact if your employer is forced to increase
            payments for group life cover and reduce payments towards your retirement
            funding.

                                                 2
            Defined benefit funds

            A defined benefit retirement scheme is exactly what the name implies; you
            are guaranteed a benefit (a pension when you retire) at a predetermined
            value or income level.

            On your first day at work you can virtually work out the pension you will
            receive when you retire, based on how much you are likely to be earning
            when you retire.

            For many years defined benefit funds were the main form of retirement
            savings, if you were employed.

            However, defined benefit funds are fast-becoming a thing of the past,
            particularly in the private sector.


1
    2
2     Extract from an Article titled: Defined benefit funds an endangered species, by Bruce Cameron September 13,
    2003



US 10394                              Pre Course / Reference Material                                       105
           In the 1980s     trade unions, seeing the immense amount of wealth being
           controlled by   employers, agitated for a move away from defined benefit
           schemes and     towards defined contribution schemes, which would give union
           members         greater     control    over     their   retirement    funds.

           Initially, employers, who thought that unions would be irresponsible in
           investing the money, opposed this move.

           But two things happened: on the whole, the unions proved to be very good at
           handling retirement money; and employers realised that they had been
           carrying all the risk with defined benefit funds, and were only too happy to be
           relieved of that risk.

           The move away from defined benefit schemes gained further impetus when,
           after years of solid investment performance, many pension funds built up
           significant surpluses, that is, more funds than necessary to cover the defined
           benefit levels. The one way employers could get their hands on the surplus
           funds was to encourage employees to move to defined contribution funds.

           Prior to legislation on the distribution of surpluses, which was approved last
           year, the best way for employers to get hold of a portion of the surplus was to
           encourage members to move to defined contribution funds, taking some of
           the surplus with them.

           In most cases, both you and your employer contribute to a defined benefit
           fund, but your employer has to pay you a pension at a predetermined level
           when you reach retirement age.

           If there is not enough money in the fund to meet your pension, your employer
           must cough up. You are not required to pay in extra. This means that all the
           risk of ensuring that you receive the pension promised to you lies with your
           employer.

           How much does it cost?
           Normally, both you and your employer contribute to a pension fund, but your
           employer is not obliged to contribute any fixed amount, however your
           employer is obliged to make good any deficit.

           The amount you contribute is worked out as a percentage of your salary,
           because the pension you receive will be a percentage of your salary when
           you retire.

           Most schemes operate on the basis that both you and your employer
           contribute to the pension fund. However, in the past, many employers took
           "contribution holidays" (that is, they did not make contributions) while the fund
           was in surplus. In terms of the new legislation on surplus distribution any
           employer who took a "contribution holiday" must now pay into the fund the
           money they should have contributed during the "holiday".

           The amount you and your employer contribute is a fixed percentage, normally
           about six percent, of what is called your pensionable salary, which excludes


US 10394                       Pre Course / Reference Material                       106
           special allowances such as motorcar allowances.

           As your salary increases, so will the actual rand amount you and your
           employer contribute, but the percentage remains constant.

           How        is     a       defined        benefit     pension        calculated?
           The pension you receive is worked out using a formula that includes your
           salary at retirement (this is often the average salary of your last two or three
           years of service), the number of years of service (or, more precisely, your
           period of membership of the retirement fund), and a factor that is based on a
           percentage of your salary at retirement, normally between one and two
           percent.

           Here is an example:

           Average monthly salary for last two years: R12 000 (R144 000 a year)
           Length of service: 30 years
           Percentage of annual salary for each year of service: 2 percent
           Calculation: 30 x 2 = 60 percent of final average salary
           Pension equals: R86 400 a year, or R7 200 a month

           However, on retirement, you are allowed to take a maximum of one-third of
           your      pension     as      a     lump      sum     cash     payment.
           This is called a commutation.


           The formula for calculating this one-third commutation varies from fund to
           fund and takes into account your age at retirement, a commutation factor
           representing the average life expectancy of fund members beyond
           retirement.

           Based on the same figures as the above example, you would calculate the
           one-third lump sum as follows:

           Annual pension: R86 400
           Age at retirement: 65


           Factor of commutation: 9

           Total value: R86 400 x 9 = R777 600

           Therefore your one-third commutation would be a lump sum of:

           1/3 x R777 600 = R259 200


           If you commute the full allowed amount your monthly pension is then reduced
           by one-third.

           This is how it works:


US 10394                      Pre Course / Reference Material                       107
           Annual pension: R86 400

           Less one-third: R28 800

           Final annual pension: R57 600

           Monthly pension: R4 800


           The Advantages of a defined benefit scheme

           the advantages for members are:


           receive when you retire. If investment markets collapse, your employer has to
           make up any shortfall to meet your promised pension;
                                                             . Tax is deferred until you
           receive the benefits. In other words, you can deduct your contributions to a
           defined benefit retirement fund from your annual income before the tax on it
           is calculated.

           The pension fund pays tax at a rate of 18 percent on any interest, foreign
           dividends and net rental it may receive from property investments.

           When you retire, any lump sum you take (after an initial tax free amount) is
           taxed at your average rate of tax, rather than the harsher marginal rate.
           Normally a maximum lump sum of R120 000 is tax free. You should always
           commute at least this portion because of the tax advantage.

           Your monthly pension, paid from the remainder of the money, will be taxed at
           your marginal rate of taxation; and
                                           better off if your die. Likewise you will probably
           be better off if you have to take early retirement because of ill health,
           particularly when you are younger.


           The reason for this is that you, or your family, will receive a pension based on
           what you could be expected to earn at your normal retirement age. Here is an
           example of a pension paid out after death or disability:


           Normal retirement age: 65

           Death or disability at age: 40

           Years of past service at early retirement due to death or disability: 10

           Number of years taken into account for calculating your pension benefit: 10 +
           25 = 35 years

           Your group life and disability assurance benefits also need to be taken into



US 10394                       Pre Course / Reference Material                        108
           account.

           The disadvantages of a defined benefit scheme

           The disadvantages for members are:


           keep up with inflation. Increases are normally dependent on the excess
           investment income of the fund. The decision whether to increase pensions is
           taken by the board of trustees of the fund. In most cases, pensioners are
           awarded increases of about 75 percent of the inflation rate every year. This
           means pensioners get progressively poorer. However, in terms of the new
           legislation, if your fund is in surplus the first claimants on the surplus are
           pensioners whose pensions have not kept up with inflation. If there is
           sufficient surplus, their pensions going back to 1980 must be brought into line
           with inflation;


           for a surviving spouse; and


           result of the fund's good investment performance. It is up to the trustees to
           decide whether to pass on some of the out-performance to you by way of
           benefit increases




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