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When can creditors target your pension?

Sars has more power than others and legislation allows it to bypass lengthy legal steps.
If one resigns or retires and opts for a cash payment from a retirement fund/annuity, the cash payment does not benefit from protection by the Pension Funds Act. Image: Shutterstock

Pension Funds Adjudicator (PFA) Advocate Muvhango Lukhaimane published a strong statement after the Johannesburg High Court overturned a recent ruling by her office which found that a retirement fund acted unlawfully when it deducted a student loan from a pension benefit that was due to an employee.

The matter concerns a complaint filed with the PFA by the employee, that R60 879 was deducted from his pension fund to settle a study loan after he resigned, instead of the R52 252 that he previously agreed to.

Lukhaimane said that there should be no reason for members of retirement funds to panic who “may falsely be led to believe” that their benefits are now capable of being ceded, pledged or attached.

According to the PFA, the order by the Johannesburg High Court is the result of an incorrect procedure followed in reopening an investigation into a matter after it was closed, when it was discovered that the Bokamoso Retirement Fund “unlawfully” deducted a student loan from a pension benefit that was due to an employee of Akani Retirement Fund Administrators.

“The order is not precedent for an employer or other types of creditors to make deductions from pension benefits that are prohibited by the Act and should not be misconstrued in that manner.

“We are aware of a media release that may create a false impression in this regard, and we feel duty bound to set the record straight for the benefit of the public we serve.”

“This is because section 37A of the Pension Funds Act is unambiguous about its prohibition of same and the order handed down in the unopposed motion court in favour of Bokamoso Retirement Fund did not and could not overrule what is expressly provided for in legislation and widely accepted to be the correct legal position”, said Lukhaimane.

The PFA had previously ordered the pension fund’s administrator to pay back the amount deducted from the employee’s retirement fund withdrawal benefit in respect of the study loan, and urged the Financial Sector Conduct Authority (FSCA) to investigate the fund for unlawful conduct.

At odds

In turn, the Bokamoso Retirement Fund and its administrator Akani said they welcome the High Court judgement that dismissed and set aside an “erroneous determination” of the PFA.

Akani managing director Zamani Letjane says the judgement proved “without a shadow of a doubt” that it acted in line with the rules of the fund.

“This is not the first time the PFA has been found wanting by the courts and their contradictory determinations are a cause for concern,” he added.

The PFA retorts that the Pension Funds Act is specifically designed to protect pension benefits from creditors, including “unscrupulous employers who may utilise their bargaining power against their employees to enter into agreements” prejudicial to the employee.

“Such agreements are unlawful in terms of the Act. The Act goes so far as to protect benefits against insolvency in section 37B, and in section 37C we find that beneficiaries are protected against even the clear wishes of a deceased member if it results in an inequity.

“There are specific limited circumstances under which a pension fund may deduct from pension benefits and those are set out inter alia in section 37D.

“The order granted, setting aside the determination, was a result of an incorrect procedure that we followed and not because a pension fund is permitted to go against the clear provisions of the Act.

“This is one of those rare circumstances where form took precedence over substance. The deduction remains unlawful and we expect the FSCA to investigate the unlawful conduct of both the Bokamoso Retirement Fund and Akani Retirement Fund Administrators in effecting the deduction, as both entities are subject to the FSCA’s regulation and should be aware of the trite legal principles,” says Lukhaimane.

“The fact that the adjudicator’s determination was set aside on procedural grounds does not make the deduction lawful and we will resist any attempt to utilise the media to distort the clear legal position. In fact, it is regrettable that persons charged with safe-guarding of members’ retirement fund benefits would seek to distort the tenor of court orders to advance their own selfish interests,” she says.

PFA/Bokamoso animosity aside, the complaints, ruling and court judgement raise the question of whether pension funds are safe from creditors, and Sars.

A thin line

The line between right and wrong when creditors eye retirement money is very thin, seemingly drawn with a very light grey pencil.

In short, retirement funds are safe from creditors, but not that safe either. It basically revolves around whose bank account the money is in.

Law firm Webber Wentzel graciously provided us with legal insight into the problem, outlining instances when an employer or creditors are legally allowed to deduct or effect a deduction from an employee’s pension fund when they resign or retire.

Webber Wentzel Partner Vlad Movshovich says that Section 37D of the Pension Funds Act mentions a few instances in which a pension fund is permitted to effect deductions without co-operation or consent of the member, such as repaying an outstanding home loan or damages due to theft, fraud or misconduct (if the employee admits to it in writing). The key words here are “without co-operation”.

“The section does not, however, restrict deduction of further amounts which have specifically been agreed by the member to be deducted,” he says, “it is not a closed list.”

However, capital that remains invested in a pension or retirement fund is largely protected against creditors by the Pension Funds Act.

Of importance is that, if a person resigns or retires and opts for a cash payment from a retirement fund or retirement annuity, the cash payment will be regarded as remuneration and does not benefit from protection as retirement funds, even if the pensioner puts it on fixed deposit and regards it as part of his pension fund.

Webber Wentzel says third party creditors such as clothing retailers, motor vehicle financiers and mortgagors with judgement debts may apply for an emoluments attachment order against this remuneration, as well as monthly annuities payable by a retirement fund administrator.

The order will be served by the sheriff on one’s retirement fund administrator who will deduct the monthly amount owed from the monthly annuity until the judgement debt is fully paid.

Any third party creditor will require a court judgement that an amount is outstanding and the creditor’s attorney will have to issue a warrant for attachment of the money held in a specific bank account.

The sheriff will execute this warrant on the bank holding the account. The account and all funds in it will then be frozen and the creditor’s attorney will instruct the sheriff to transfer the funds to the creditor.

Sars has more power

Webber Wentzel partner and tax expert Joon Chong indicated in answers to questions that the SA Revenue Service has more power to recoup outstanding tax debts. “Sars can require a retirement fund to hold back or deduct outstanding tax debts of an individual through the third party appointment process set out in section 179 of the Tax Administration Act (TAA).

“Sars may appoint third parties such as employers, retirement fund administrators, banks, insurance companies, investment managers and debtors to deduct the outstanding tax debts from any money held for, owed to, or to be paid to the individual, and to pay the amounts deducted to Sars. “Effectively, these third parties are appointed as ‘agents’ to deduct and pay to Sars the outstanding tax debts,” says Chong.

The process is simple. Sars must send a final letter of demand to the taxpayer at least ten business days before instituting the third party agent appointment process, she says, “unless the final demand would prejudice the collection of the tax debt”.

“When an individual resigns, is retrenched or retires, their pension or provident fund will apply for a directive from Sars on the amount of PAYE to be withheld from the lump sum payments or lump sum withdrawals. A retirement annuity fund administrator will also be required to apply for a directive from Sars on the amount of PAYE to be withheld from the lump sum withdrawals on retirement.

“Sars will issue an IT88L directive for an amount deductible as PAYE by the retirement fund administrator for the income tax amounts from the lump sum payments or withdrawals, existing income tax debts, administrative penalties and provisional taxes owed by an individual.

“The IT88L effectively acts as a ‘stop order for taxes in arrears’ for the retirement fund administrator to deduct the tax debts from the lump sum amounts and pay them to Sars,” she says.

Chong adds that any amount received by a person as monthly annuities from a retirement fund is seen as remuneration and subject to PAYE. “These amounts can be targeted by Sars and third party creditors.

“Sars can appoint the retirement fund administrator as its third party agent to collect your tax debts as the retirement fund administrator is your ’employer’ responsible to withhold PAYE on the annuities and remuneration payable to you.

“Should the employer not comply with Sars’s instructions, the employer will be personally liable for the amounts not deducted.

“If you have accumulated your monthly annuities to a money market account over time, Sars can also issue a third party appointment letter to the bank requiring the bank to deduct your outstanding tax debts from amounts in the money market account and pay the amounts to Sars,” says Chong.

…And Sars does

A while back, a Moneyweb reader responded to an article about Sars getting tough with taxpayers. “I’m a pensioner of 72 years old. Sars grabbed my life savings of R47 000. I had a business 11 years ago, my bookkeeper didn’t close it at Sars.

“After I lost everything, they even take my Sassa to pay off interest and penalties. Nobody can help,” he wrote, attaching a picture of the letter Sars sent to Capitec Bank to attach his savings.

In this case, the money was simply in a bank account and not in a retirement fund, but it was his pension.

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