The transfer of retirement benefits to a preservation fund and the single withdrawal you are allowed to make from a preservation fund give rise to numerous complaints to the Pension Funds Adjudicator.
In his latest annual report, John Murphy, the adjudicator, says the confusion about the single withdrawal largely arises from uncertainty over where the rules of a pension fund stand in relation to the what the South African Revenue Service (SARS) has laid down.
A notice issued by SARS to the pension funds industry states that a preservation fund may only pay one withdrawal benefit to a fund member before he or she reaches the age of 55.
The notice further says that any amount deducted from the sum that is being transferred from a retirement fund to a preservation fund should be regarded as the member's first and final withdrawal benefit from the preservation fund.
However, what funds, employees and SARS sometimes fail to recognise is that the rules of a preservation fund determine the benefits to which you are entitled. In other words, if the rules differ from the SARS notice, the rules prevail, Murphy says.
"We have made this point more than once and did so again in the case of the Wealth Builder Pension Preservation Fund."
A member of the fund, who was employed by Southern Life until his retrenchment, was entitled to an early withdrawal benefit.
He consulted his employer and his financial adviser and chose to take a cash benefit of R82 000 and to transfer the balance of about R250 000 into a preservation fund.
He maintains that he was under the impression, by virtue of the advice given to him, that he would be entitled to a further withdrawal from the preservation fund.
When he later wanted to make a further withdrawal, the fund refused, based on the notice from SARS.
Murphy says the rules of the preservation fund allowed members to make one withdrawal before retirement.
The rules did not include a provision deeming a withdrawal made before transferring the benefit to the preservation fund as constituting the single withdrawal as contemplated by SARS rules. Therefore, despite the fact that the member had not transferred his entire withdrawal benefit to his preservation fund, the rules of the fund permitted him to make a single withdrawal from his investment account.
Murphy ordered the fund to allow him to make the withdrawal.
"Insofar as the rules failed to comply with the directives of SARS, it was a matter between the fund and SARS and this does not alter the fund's liability to the members, which is regulated by the rules of the fund," Murphy says.