Retirement Benefits: Always protected against creditors?

The belief exists that retirement benefits attached to a retirement fund will always be protected against creditors. Although this is certainly true in most instances, it may happen that the benefits can be used to pay creditors in a few situations. This cannot happen while the money is in the fund, but it is possible where the benefits become payable.

The protection awarded to retirement benefits and the exceptions to the protection are governed by section 37 of the Pension Funds Act. This section determines as follows:

Section 37B of the Pension Funds Act: The insolvent member

This section protects pension benefits payable to a person who is sequestrated and determines that no benefit payable to such a person may in any way be attached by creditors. This, however, is subject to the following deductions which will be allowed:

  • Amounts due in terms of certain housing loans and guarantees provided by the fund to the member;
  • Amounts due by the member to his employer in terms of housing loans granted to the member and guarantees provided by the employer to or on behalf of the member;
  • Compensation due to the member’s employer for damages due to theft, dishonesty, fraud or misconduct, where the member admitted liability in writing, or judgement was obtained;
  • Amounts due to the fund for arrear contributions, except where the contributions were deducted by the employer from the member’s salary, but not paid to the fund;
  • Amounts due to SARS in terms of the Income Tax Act;
  • Amounts payable to a non-member spouse on divorce in terms of a valid court order and any employee’s tax payable due to this reduction;
  • Amounts payable in terms of a maintenance order and any employee’s tax payable due to this reduction;
  • Amounts the fund paid, or will pay, on behalf of the member towards medical aid contributions, long-term insurance premiums or any other payment approved by the registrar.

These amounts may also be deducted from the retirement benefits where the member is not insolvent or dies, and the benefits become payable. (Sections 37A and 37D)

Section 37C of the Pension Funds Act: The deceased member

In the case of the death of a member, the retirement benefit becomes payable to a dependant, nominee or the deceased estate (or a combination thereof). The same deductions as discussed above will apply to the benefits.

The following rules will apply regarding the payment of the benefits:

  • Firstly, the trustees of the fund must ascertain, within twelve months of the member’s death, who his dependants are, if any. They must then distribute the benefits amongst the dependants in a manner and proportion they deem fit and equitable according to the dependant’s individual needs.
    • A dependant is defined as the spouse and children (regardless of age) of the member, or any person for whom the member is legally liable for maintenance, or was in fact dependant on the member for maintenance.
    • If there are dependants and nominated beneficiaries, the trustees may distribute the benefits between the dependants and nominees as they deem equitable.
    • Where there are no dependants, but beneficiaries were nominated, the benefit must be paid to the beneficiaries in proportion to the beneficiary nominations.
    • In all other cases (no dependants or beneficiaries) the benefit will be paid to the deceased estate.

Where there are dependants, the benefits will be protected against creditors, except for the abovementioned deductions. If there are no dependants or beneficiaries nominated, the benefit will be paid to estate and can be used to the benefit of creditors.

Creditors may also benefit from retirement fund proceeds where there are no dependants, but a beneficiary is nominated. In terms of section 37C, where a beneficiary is nominated (and there is no dependant), the trustees must firstly pay an amount to the deceased estate insofar the liabilities exceed the assets, and only if there is a surplus will this be payable to the beneficiary.

From the above it is clear that retirement benefits are largely protected against creditors, and it is certainly a favourable consideration when comparing retirement benefits against other investment avenues. However, there will be some instances and some creditors who may be able to benefit from a retirement fund payment, but only as and when the benefits become payable.

What is also clear is that SARS will always get their money. You can run, but you can’t hide!

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