Understanding the exemption of legacy policies in the new pension system

Members of pension funds must understand the implications of the new two-component retirement system and how legacy policies are exempted from it, following a recent ruling by the Pension Funds Adjudicator.

Any policy in respect of a retirement annuity plan entered into before 1 September 2024 - is exempted from the two-component benefit system.

The two-component pension system, implemented on 1 September 2024, splits retirement fund contributions into a "Savings Component" and a "Retirement Component". One-third of contributions goes to the Savings Component, which allows members to withdraw funds before retirement, while the remaining two-thirds go to the Retirement Component, which must be used to purchase a retirement income product. 

Muvhango Lukhaimane, the Pension Funds Adjudicator, recently ruled on a complaint received from a fund member, who was aggrieved that the South African Retirement Annuity Fund denied him his right to withdraw from his savings component.

The complainant’s policy commenced on February 1, 1998, with a contractual retirement option date of February 1, 2028. The complainant had a fund credit of R63 134.74 on June 15, 2024. The fund submitted the Income Tax Act (ITA) provides for the exclusion of legacy policies, defined as pre-universal life and universal life policies. It indicated that the complainant’s policy fell under this category and was, therefore, excluded from the new two-component retirement system.

In compliance with the rules of the Financial Services Conduct Authority, the fund amended its rules to provide that the relevant elements of the two-component system would not apply to legacy retirement annuity policies.

The fund submitted that the complainant had an option to transfer his current policy to a two-component compliant retirement annuity to benefit from the new system. The deadline for this transfer was August 1, 2024, and the fund did not receive a transfer request within this period. The fund indicated that the complainant may transfer this contract to a compliant retirement annuity.

However, he would need to reinstate the premiums to start accumulating value in the savings component going forward to exercise a savings withdrawal in terms of the two-component retirement system.

In her determination, Lukhaimane said it was clear from the fund’s submissions that the complainant’s policy was exempted from the two-component retirement system in terms of section 1 of the ITA and the fund rules.

She said she was satisfied the fund acted lawfully in terms of its rules, the ITA and the policy contract in refusing to pay the complainant the withdrawal he requests. The complaint was dismissed.

The Office of the Pension Funds Adjudicator is a statutory body established to resolve disputes in a procedurally fair, economical, and expeditious manner. The adjudicator's office investigates and determines complaints of abuse of power, maladministration, disputes of fact or law and employer dereliction of duty in respect of pension funds. 

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