Understanding the legacy policy exemption in South African retirement annuities

Members of pension funds are advised to understand that a legacy policy, any policy in respect of a retirement annuity plan entered into before September 1, 2024, is exempted from the two-component benefit system, according to the pension funds adjudicator, Muvhango Lukhaimane.

She says the two-component pension system, implemented on September 1, 2024, was designed to offer greater flexibility to retirement fund members by splitting contributions into two distinct components.

One-third of the contributions are allocated to a Savings Component, which allows members to make withdrawals before retirement, while the remaining two-thirds go to the Retirement Component, which must be used to purchase a retirement income product upon reaching retirement age.

Recently, Lukhaimane ruled on a complaint from a fund member who was frustrated that the South African Retirement Annuity Fund denied his request to withdraw from his savings component.

According to case details, the complainant’s policy commenced on February 1, 1998, with a contractual retirement date set for February 1, 2028. As of 15 June 2024, he had a fund credit of R63,134.74.

The fund explained that the Income Tax Act (ITA) excludes legacy policies—defined as pre-universal life and universal life policies—from the new two-component system. The complainant’s policy falls within this category, meaning he is not entitled to the benefits of early withdrawals under the new system.

She says to ensure compliance with the Financial Services Conduct Authority (FSCA), the fund amended its rules to confirm that legacy retirement annuity policies remain unaffected by the regulatory changes. The fund further explained that the complainant had the opportunity to transfer his policy to a two-component compliant retirement annuity before the deadline of August 1, 2024.

Since he did not request a transfer, his policy remains under the legacy framework, making it ineligible for withdrawals. However, if he wishes to benefit from the new system, he would need to reinstate premium payments to start accumulating value in the savings component, allowing him to exercise withdrawals in the future, Lukhaimane says.

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

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

PERSONAL FINANCE