Your pension fund can in terms of the law either lend you money to buy a house or guarantee a loan you get from a home loan provider.
However, because of the costs involved in administering a home loan, funds generally prefer to provide guarantees for a home loan you get from a bank or another home loan provider.
The Pension Funds Act sets out the circumstances under which your fund may lend you money for a home or guarantee a home loan from the likes of a bank.
Section 19(5) of the Act states that your fund can either lend you money or stand as a guarantor on your behalf, so that you can:
- Buy a home;
- Buy land on which to build a home; or
- Renovate your existing home.
However, before your fund will provide a home loan or stand guarantor for the loan, it will require you to provide the security of:
- A first mortgage bond on the property concerned;
- A pledge that your retirement fund benefits can be used to repay the bond; or
- A combination of the above two options.
Your fund may not grant you a loan on more than one property.
The capital amount of the loan must be repaid within 30 years in weekly or monthly instalments.
If the repayment period exceeds your normal retirement date, then at your normal retirement date you must be able to pay the outstanding balance of your loan with not more than one-third of the total retirement benefits due to you.
Two-thirds of your savings in a retirement fund must be used to purchase a pension for life.
If the loan or guarantee is secured by a mortgage bond, the loan may not be more than 90 percent of the value of your property.
If the loan or guarantee is secured by your pledging your withdrawal benefits to the retirement fund, the loan or guarantee may not be more than either the lowest early withdrawal benefit you would receive after you have paid income tax on it or the property's fair value, whichever is lower.
If you have secured the loan or guarantee through both a mortgage bond and a pledge of your benefits, the loan or guarantee cannot be more than the lesser of:
- The amount equal to the aggregate of 90 percent of the property's fair value and the lowest benefit you would receive after income tax; or
- The fair value of your property.
The loan may be increased to a 100-percent loan if your employer is prepared to give your retirement fund an irrevocable guarantee for the full amount of the loan.
Repaying the loan
If you borrow money from your retirement fund or if your fund gives a guarantee for a loan you take out to buy or renovate a home or buy land, the Pension Funds Act does provide for deductions from your benefits if you haven't repaid the loan by the time you leave the fund.
Sections 37(a) and 37(d) of the Pension Funds Act set out the circumstances under which your employer may request your fund to make a deduction from your withdrawal benefits when you retire, resign or are retrenched.
Your retirement fund can deduct what you owe on a home loan granted by or guaranteed by the fund from any benefit due to you if you resign, are retrenched or retire.
If you are transferring to another fund and the board of trustees of the current fund is satisfied that it is not possible to negotiate repayment of the loan or to transfer the loan or guarantee to the new fund, it can also deduct what is owed.
Your employer also has the right to request that your fund deduct money from your benefits in respect of a home loan from your employer or a home loan for which your employer has stood as a guarantor.
Other deductions
The Pension Funds Act does not allow the fund or your employer to make deductions from your pension fund benefits for any other loans.
Neither can any other creditor, such as a bank, from which you have borrowed money to buy a motor vehicle, claim any benefits in your retirement fund. A creditor may, however, claim any benefit that is paid to you in cash.
There are a few other limited exceptions where any deductions can be made from your savings in a retirement fund. These are:
- In terms of Section 37 of the Pension Funds Act, your employer can deduct money from your benefits if there is a maintenance order against you that you have failed to honour.
- A court-approved divorce settlement that entitles a non-member former spouse to a share of the benefits in the fund. In terms of the clean-break principle introduced in 2007, the withdrawal must be made immediately on the granting of the divorce order.
- On application from the South African Revenue Service, a retirement fund must deduct from your benefits any arrear tax you owe. Any tax that is due on your benefits when you retire or when you make an early withdrawal must be deducted by the fund before you are paid the benefits.
- Any amount that your employer can legally justify as having resulted from theft, dishonesty, fraud or misconduct on your part.
However, you must have either admitted liability to your employer in writing, or your employer must have obtained a judgment against you in a magistrate's court.
- When you retire, resign or are retrenched, your retirement fund can deduct from your benefits any medical scheme contributions or insurance premiums that it has paid on your behalf.
If the rules of your fund allow it and you have such an agreement with your fund, it can, while you are still a member of the fund, deduct from your benefits amounts payable to your medical scheme or insurance company and pay these amounts on your behalf.
Employer ordered to pay back benefits
The Pension Funds Adjudicator recently ordered an employer to pay back to a member his provident fund withdrawal benefit, which had been withheld because the man defaulted on an employer-guaranteed loan.
Rudi Kruger told the Pension Funds Adjudicator, Mamodupi Mohlala, that his employer, Busby Trading, offered to stand as guarantor so that he could qualify for a vehicle loan from Nedbank.
However, Kruger defaulted on his repayments, and Nedbank repossessed the vehicle and sold it. As the guarantor, Busby Trading had to settle the shortfall of R27 651.
Kruger resigned from Busby on April 25, 2006 and was entitled to a withdrawal benefit of R33 712 from the House of Busby Retirement Benefit Fund.
Kruger says that, at Busby's request, he went to the company's offices on May 17, 2006. There Kruger was presented with a contract stating that, in the event of his leaving the company, the vehicle would become company's property and that Busby had the right to his provident fund benefits to pay the outstanding balance on the vehicle.
Kruger says he refused to sign the contract at first, but was assured that Busby was well within its legal rights to insist that he did so.
Kruger says he did not realise that he signed a document that was back-dated to May 17, 2005.
It was only when Kruger approached the fund administrator, Liberty Life, that Kruger was made aware that his withdrawal benefits had been paid to Busby as per the company's instructions.
In its defence, Busby says it sold the vehicle to Kruger and guaranteed the loan on condition that if he defaulted it could retain his retirement fund benefits to mitigate any loss.
Busby said it had contacted Kruger several times to inform him that he could collect the R4 551 of his benefit that remained after the outstanding loan had been deducted.
But Mohlala found that Busby was not allowed in terms of the Pension Funds Act to make the deduction.
She says:
- A car loan does not qualify as a deduction that is allowed for a home loan from a retirement benefit;
- There was no court judgment against, or legally valid admission of liability by, Kruger; and
- There was no damage to the company as a result of theft, dishonesty, fraud or misconduct on the part of Kruger.
She ordered Busby to pay Kruger the full benefit of R33 712, plus interest from the time the benefit was due.
Home loans and secret profits
A recent investigation by the Financial Services Board (FSB) found that home loans for which retirement funds give guarantees are often provided by a subsidiary of the fund's administrator.
The FSB says any home loan provider, including one that is a subsidiary of your fund's administrator, can charge you interest on the loan and can make a profit on the loan by charging you more interest than it costs the provider to raise the money.
However, Jurgen Boyd, the registrar of pension funds at the FSB, says if the administrator of your retirement fund earns money from the company that provides the loan and this is not disclosed to the fund concerned, this could amount to a secret profit.
If an administrator is making secret profits in this way, its licence to operate could be withdrawn.
Boyd says retirement fund administrators have to be licensed by the FSB and are subject to regulation under the Pension Funds Act. However, the companies that provide home loans backed by retirement funds are not subject to the supervision of the FSB. As credit providers, these companies must comply with the National Credit Act and are subject to supervision by the National Credit Regulator.