Borrowing from your retirement fund: What you need to know

The current economic climate has led some people to consider dipping into their retirement funds to access capital. But what exactly can you use these funds for, and what percentage of your savings can you access? Devon Card, a certified financial planner at Crue Invest, provides clarity on this.

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As it currently stands, Section 19 (5) of the Pension Funds Act allows a retirement fund to provide a loan or guarantee to a member for housing-related purposes. The purpose of this legislation is to provide assistance to members in financing their genuine housing needs, including the purchase of a property or plot, property renovation, or paying off a home loan. Such a loan cannot be used for any other purpose. Further, in order to qualify for such a loan, the property in question must be a primary residence owned by the member or the member’s spouse, or jointly owned by the two.

In the aftermath of the Covid-19 pandemic in South Africa, there have been calls to allow retirement fund members to access their funds for purposes other than home financing, although these proposals have been rejected by Treasury. With so many South Africans being under-funded for retirement, borrowing from one’s future retirement nest egg can be dangerous. In this article, we explore the mechanisms for borrowing from a retirement fund, the circumstances under which it is permitted, and the effects of doing so on your broader financial planning.

Firstly, while the Pension Fund Act makes allowance for housing-related loans, it also stipulates that each retirement fund must set out its own rules in this regard, meaning that a retirement fund can elect not to allow for housing-related loans when setting out its rules. There are only a handful of retirement funds in South Africa where members are able to take a loan directly from their fund. Common practice amongst the retirement funds that do provide such loans is to facilitate pension-backed home loans by providing the member with a guarantee which can be used to secure finance with a bank or financial institution. While the Act does provide for it, it is interesting to note that currently no individual retirement annuities make provision for such guarantees, and it is only employer-linked pension and provident funds that currently do so.

If you’ve established that your retirement fund rules make provision for such loans, you will need to make an application to the fund in order to obtain a guarantee before applying for a home loan through a registered financial institution. Whether you are applying for a direct loan or a pension-backed guarantee, bear in mind that value may not exceed the fund credits, net of tax, that you would be entitled to should you be forced to withdraw from the fund. Further, the value cannot exceed the value of the property you are looking to purchase or the cost of the quoted renovations. However, where a member is applying for a pension-backed guarantee, it is common practice to allow a member up to 60% of the fund value, net of tax, and not more than the cost of the property or the quoted renovations. In terms of the Pension Funds Act, the rate of interest charged to a member borrowing directly from the fund cannot be lower than Prime plus 2% per year, while the interest charged by banks in the case of a pension-backed guarantee falls within the discretion of the lending institution itself.

Pension-backed home loans are aimed at helping members buy, renovate or build their primary residence and, as such, the risks are much lower than in the case of a member who simply wants to access his funds unnecessarily. Where a member borrows directly from his retirement fund, he is liable to repay the loan plus interest over a maximum term of 30 years, or by retirement age, keeping in mind that the trustees of the fund have a responsibility to do an affordability check before granting approval for the member to withdraw funds.

Where the member applies for a pension-backed guarantee, which is the more common approach, the financing institution will still need to perform lending checks to ensure that the member can afford the monthly repayments. As such, while it should not be considered irresponsible to take a direct or pension-backed loan from your retirement fund, it is always advisable to consult with an independent financial advisor before doing so – especially as you will need to understand the implications should you leave the fund or default on your repayments.

When making an application for a loan, the relevant departments and financial institutions will need to do their due diligence in determining the member’s affordability. Where a member’s credit score is low as a result of high levels of debt or poor debt repayment history, it is unlikely that the financial institution will approve the home loan, even where a guarantee has been issued. In making the application, the member would need to provide the fund and the financial institution with a copy of their ID, proof of residence, last three months’ bank statements and payslips, proof that the loan is for housing-related purposes, and proof that there are no administration orders against his salary or wages.

Keep in mind that the process of applying for a pension-backed guarantee is slightly quicker as the application is only subject to the approval of the fund’s trustees. On the other hand, where a member applies for a direct loan from the fund, he will need to need to apply both to the fund and to the financial institution from which he seeks financing. However, most retirement funds that allow for pension-backed home loans normally have partnerships with financing institutions to allow for a more streamlined application process.

Where a member is under debt review, it is highly unlikely that a pension-backed home loan will be approved. Anyone under debt review is considered heavily indebted and therefore unable to take on any new credit – keeping in mind that the applicant must be able to afford the repayments and cannot have any garnishee or administration orders against him.

Before applying for a direct loan from your retirement fund or a pension-backed guarantee, our advice is always to consult with an independent advisor to ensure that you fully understand the implications of doing so in the context of your broader financial plan.

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Devon Card

Crue Invest (Pty) Ltd



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This article is not very helpful. Practically no funds offer direct loans as they then need to comply with the messy National Credit Act requirements. Consequently they allow a benefit to stand as surety (guarantee) for the banks. This does not impact the retirement savings trajectory other than if the loan is settled from the retirement savings on exit which is rarely a good idea.
It remains a mystery why banks never consider retirement fund balances in assessing the credit risk of their clients and affording them better terms. Any client saving responsibly for retirement should be a responsible mortgage repayer.

Except that most of the time they are not saving responsibly, its the employers forced “saving” on their behalf as part of their package

It is not really a mystery why bank never take retirement fund balance into account for assessing credit risk.

Retirement funds are protected from creditor by legislation so you could have millions saved there but that means nothing to the bank if you owe money as they cannot use those funds to settle your debt. So unless the laws are changed to allow then access to those funds for creditors in case of non-payment (something which may not be in the consumers overall interest) then any retirements funds you have are of zero value in assessing your credit risk.

You responsibly saving for retirement also doesn’t impact your current affordability or your current debt levels and even if you never intend to not pay your creditors sometimes your circumstances just don’t allow it. People who declare bankruptcy are not all “bad” people who intended from the start to loan money and not pay it back.

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