A retirement fund acted lawfully when it denied a member’s request to make a withdrawal from his savings component because the two-pot system excludes legacy retirement annuity (RA) contracts, the Pension Funds Adjudicator has found.
The two-pot system, implemented on 1 September 2024, splits retirement fund contributions into a savings component and a retirement component. One-third of contributions go to the savings component, from which members can withdraw before retirement (subject to meeting certain conditions). The remaining two-thirds go to the retirement component and must be used to purchase an annuity at retirement.
The Income Tax Act (ITA) automatically excludes members of legacy RA funds from the two-pot system. Legacy policies allowed individuals to buy an assured lump sum on death and to share in investment returns at portfolio level.
A member of the South African Retirement Annuity Fund (SARAF) complained to the Office of the Pension Funds Adjudicator (OPFA) in October last year. The complainant submitted that the fund was denying him his right to withdraw from his savings component. He asked the OPFA to investigate the matter and order the fund to allow him to access his savings component.
The complainant’s policy, identified as a FlexiPension (no cover) plan, started on 1 February 1998 and had a maturity date of 1 February 2028.
The complainant had a fund credit of R63 134.74 on 15 June 2024.
Option to transfer
In its response to the complaint, SARAF said the ITA excludes legacy policies, defined as pre-universal life and universal life policies, from the two-pot system. The complainant’s policy fell into this excluded category.
The fund said it informed the complainant in July 2024 that his policy did not qualify for the two-pot system. It offered him the option to transfer his policy to a two-pot-compliant RA, so he could benefit from the new system. The deadline for the transfer was 1 August 2024. The fund indicated it did not receive a transfer request within this period.
SARAF said the complainant’s policy was paid-up (no premiums were being paid). If the complainant chose to transfer his legacy contract to a compliant RA, he would have to reinstate the premiums to start accumulating value in the savings component, which would enable him to make a withdrawal from this component in future.
In an email in November 2024, the complainant said he had not received assistance with a transfer quotation. SARAF said this was because he never formally requested a transfer to a compliant policy.
SARAF indicated a willingness to revisit the issue under certain conditions. “If the complainant could provide evidence that he and his broker or financial adviser attempted to transfer the policy before 1 September 2024, it would investigate further and determine whether it could request a waiver from its actuarial services to allow the transaction,” the fund submitted.
Fund met the exemption conditions
In her determination, the Adjudicator, Muvhango Lukhaimane, said it was clear from SARAF’s submissions that the complainant’s policy was exempted from the two-pot system in terms of section 1 of the ITA and the fund’s rules.
The ITA defines legacy policies as those entered before 1 September 2024 with a pre-universal life or universal life construct, subject to conditions determined by the Financial Sector Conduct Authority.
In August last year, the FSCA published the conditions that legacy RAs must meet for them to be exempted from the two-pot system.
The FSCA’s RF Notice 17 of 2024 specifies that exempt policies must predate 1 September 2024, be closed to new members, have a fixed contract with limited changes, and offer specific benefits, such as a sum insured at retirement or death with no partial withdrawal option.
The fund must prove that applying the two-pot system will harm members’ benefits, offer a transfer option to a compliant product, amend its rules, and inform members clearly.
SARAF met these conditions, and its amended rules – which were approved by the FSCA – define legacy RA policies as exempt from the two-pot system. The complainant’s policy fitted this category, Lukhaimane said.
The complainant was given until 1 August 2024 to transfer his policy to a two-pot-compliant product, but he did not respond or request a transfer.
Lukhaimane found that the policy’s exemption under the ITA and the fund’s rules meant the fund could not legally allow the withdrawal.
“If the fund rules do not afford a fund the legal power or capacity to do something, then such purported act by the fund is ultra vires and accordingly null and void,” she said.
