I would like to know whether the one-third payout from a retirement annuity at retirement age would be protected from creditors?
Thank you for sending your question through. You have raised a very important question as it is vitally important to understand how and when your retirement fund benefits enjoy protection from one’s creditors.
At the outset, please note that all monies held within a retirement fund – including pension, provident and retirement annuity funds – enjoy protection from creditors in terms of Section 37 of the Pension Funds Act. This piece of legislation prevents retirement benefits from ‘being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of a court of law, or to the extent of not more than R3 000 per annum’. In other words, your retirement fund money cannot be attached by creditors in an amount above R3 000.
Further to this, please note that your retirement fund assets fall outside of one’s insolvent estate. This means that, if you are declared insolvent, your creditors will have no claim against your retirement fund money.
However, there are some notable exceptions to this protection. In terms of the Income Tax Act, any amounts due and payable to Sars can be claimed from a person’s retirement fund money. Further, any amount owing as part of a maintenance claim in terms of the Divorce Act and Maintenance Act may be claimed from a person’s retirement fund.
If you are a member of a company pension or provident fund, the act allows for claims in respect of loans or guarantees which become payable for such loans made to the member. An employer may also claim from a member’s retirement fund interest for damages caused to the employer which are attributable to the misconduct of the member.
Keep in mind that the above exceptions only apply to money held within a retirement fund structure. Once the funds are withdrawn from a retirement fund – either through a one-third lump sum withdrawal or a withdrawal taken before normal retirement from a company fund – the funds are first taxed in accordance with the applicable tax tables and then paid to the member in cash, at which point the money is no longer governed by the rules of the Pension Fund Act and no longer enjoys protection from creditors. Once received as cash, this money will be viewed as any other available funds for the purposes of debt judgements.
Our recommendation would be that you speak with a professional advisor who is a qualified CFP®. Alternatively, you may want to consider debt counselling to help structure your decision-making and to ensure that your money remains protected.