The purpose of this legal note is to explain briefly the impact of the Two Pot Retirement System on Section 37D deductions in terms of the Pension Funds Act.
Divorce
Recent amendments to the Pension Funds Act have introduced changes in respect of divorce orders and affect more than only the changes needed to give effect to the two-pot system. The following divorce related changes were made in the Pension Funds Amendment Bill (‘PFAB’).
The current definition allows for a divorce order to be enforceable against the fund where the date of divorce is before the member exits the fund. It will change drastically from the previous definition, as it proposes the pension interest to be the member’s share of the value of the fund, determined in terms of the rules of that fund, on the date of the court order. In effect, this means that, irrespective of the member’s status in a fund, if a member has a benefit in the fund, the divorce order can be affected. This would include active, unpaid and preserved members, as well as deferred retirees and pensioners.
In other words, new the definition of pension interest in the PFAB extends enforceable divorce orders to benefits in the fund after the member has left service. The amount payable in terms of an enforceable divorce order will reduce each of the vested, retirement and savings components proportionately. If there is a pending divorce, the non-member spouse must consent to the member claiming a savings withdrawal benefit.
In a defined benefit fund, the application is more complex, pensionable service will be reduced in the vested, savings and retirement components proportionately and not by reduction of the Rand amount as in defined contribution funds.
In the case of a pending divorce, the non-member spouse is required to give written consent to the Fund, to suspend payment from the member’s savings component. It follows then that the member will not be allowed to withdraw from their savings component, in this scenario for that specific tax year. Once the divorce order is settled, the member will be able to withdraw from the savings component going forward in future tax years.
Maintenance
The definitions of a Beneficiary fund have been amended to allow these funds to pay arrears and future maintenance orders. This means that funds that cannot give effect to a maintenance order can transfer that obligation to a beneficiary fund. The maintenance order must be deducted proportionately from all components available at the date of the payment. Withdrawal benefits from the savings component may be suspended if there is not enough money to pay both the maintenance order and a savings claim.
Maintenance orders can be deducted off the capital amount of a pensioner’s pension after retirement.
In a defined benefit fund, pensionable service will be reduced in the vested, savings and retirement components proportionately and not by reduction of the Rand amount as in defined contribution funds.
Employer Claims
Your retirement savings can be used to pay any compensation due to your employer if they have suffered a financial loss because of your involvement in fraud, theft, dishonesty, or misconduct.
Deductions can occur when a member retires, when a member leaves the fund or when a member’s employment with an employer terminates. An employer can rely on a civil or criminal judgment to make a deduction for employer compensation.
The deduction of an amount to settle employer compensation will reduce each of the vested, retirement and savings components proportionately. The saving withdrawal benefits may be suspended if there is a pending employer compensation process underway.
If a judgement has been received and the deduction made and the employer has been paid, the fund can continue with a savings withdrawal benefit if there is money left in the savings component.
If a judgement has been received and the deduction has not been made yet, the fund will suspend the savings withdrawal benefit until the employer compensation is settled.
If there is a pending judgement or judgement has not been received yet, then the fund will check if the member has enough funds to pay the employer. If there are enough funds to pay the employer, then the fund can continue with the savings withdrawal benefit.
If there are not enough funds to pay the employer, the fund must suspend any savings withdrawal benefit for 12 months.
If the amount being claimed is unknown, the trustees won’t be able to assess if there are enough funds to pay the employer compensation and a savings withdrawal benefit, then the trustees will have to decide whether they suspend the savings withdrawal benefit.
In PFAB, the requirements have been expanded to clarify that a judgment for employer compensation can include a civil or criminal judgment:
the member has in writing admitted liability to the employer; or
judgment has been obtained against the member in any court, including a magistrate’s court, and includes a compensation order granted in terms of section 300 of the Criminal Procedure Act, 1977 (Act No. 51 of 1977).
Pension-backed home loans
With effect from 1 January 2023, Regulation 28 was amended to reduce the direct housing loans and guarantees granted to members from 95% to 65% for new loans.
PFAB contains a change to section 19(5) to limit a housing loan or guarantee granted to 65% of the member’s individual account or minimum individual reserve in the member’s interest in the savings, retirement and vested components.
Before any new housing loan or guarantee is granted, the non-member spouse will have to consent to that application if there is a pending divorce. A savings withdrawal benefit can only be paid to a member if there is enough money in the components to settle any existing housing loan or guarantee and pay a savings withdrawal claim out of the savings component. The deduction of an amount to settle a housing loan or guarantee will reduce each of the vested, retirement and savings components proportionately.
From 1 September 2024 before any new housing loan or guarantee application is granted, a fund will need the consent of the non-member spouse to grant a loan or guarantee to a member if the fund received written notification from the member or non-member spouse with proof that a divorce has been instituted, as defined in the Divorce Act; or an application has been made for a court order in respect of the division of assets of a marriage in accordance with the tenets of any religion.
If the member has applied for a housing loan, the fund will inform the bank or member that there is a pending divorce or divorce instituted and consent is required from non-member spouse for the loan application to proceed. The fund, or its administrator, will send to the member the consent form that must be completed by the non-member spouse. Consent must be obtained by the member from the non-member spouse.
A housing loan or guarantee will be settled when a member withdraws from a fund or retires or defaults on the loan. If a member defaults on their loan or leaves (withdrawal or retirement claim received) the fund, the housing loan or guarantee must be settled first. The reduction of the housing loan balance must be done proportionately across all components, savings, vested and retirement components, available at the date of the reduction.
Members should consider how divorce orders, maintenance orders, employer claims and pension-backed housing loans might impact them, should they withdraw from their savings component. Furthermore, member awareness and education are important in order to understand the impact the aforementioned allowable deductions have on their retirement outcomes.
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