Preservation Funds- Conditions Applicable to the Once-Off Withdrawal Rule and the Splitting

PRESERVATION FUNDS- CONDITIONS APPLICABLE TO THE ONCE-OFF WITHDRAWAL RULE AND THE SPLITTING OF BENEFITS

RF 1/2012 was issued on 1 November 2012 and replaced RF 1/2011in total with effect from 1 November 2012.This means that the current conditions governing preservation funds are set out in the definitions of pension and provident preservation fund in the Income Tax Act (ITA), read together with the provisions of RF 1/2012.

RF 1/2012 clarified the following two interpretational problems encountered with RF1/2011 regarding the once-off withdrawal rule:

• Member’s position with regard to access to benefits before transferring to a preservation fund: A member may make a cash withdrawal from his occupational fund and transfer the balance of his withdrawal benefit to a preservation fund. Such a transfer is tax-neutral and does not preclude the member from accessing a further once-off withdrawal benefit in the preservation fund.

We interpret this provision, read together with the definitions of pension and preservation fund in the ITA, to mean thatif an amount is deducted from a member’s benefit in terms of section 37D of the Pension Funds Act, excluding an amount deducted in terms of a divorce order, such deduction will be regarded as the member’s “one cash withdrawal” prior to transferring to the preservation fund. Once a member of the preservation fund, such person can again take a cash withdrawal from the preservation fund.This means, for example, that a person's housing loan can be settled and then when he becomes a member of the preservation fund he can again make a cash withdrawal as the settlement of his housing loan is no longer deemed to be his once-off withdrawal.

• Transfers from a preservation fund to a retirement annuity fund: With effect from 1 March 2012, a member of a preservation fund may transfer his benefit tax-free to a retirement annuity fund.

RF 1/2012 confirmed the following two additional conditions for the splitting of benefits:

• Benefits may not be paid or transferred to a preservation fund in such a way that it is split between more than one preservation fund.
• Benefits transferred from a preservation fund may only be transferred to one occupational fund; or one preservation fund; or one retirement annuity fund; or a combination of one preservation fund and one retirement annuity fund; or a combination of one occupational fund and one preservation fund; or a combination of one occupational fund and one retirement annuity fund.

Important Note: The rules of preservation funds that require amendments to comply with the conditions of RF 1/2012 must be submitted for approval to the FSB before 28 February 2013, failing which the tax approved status of such fund will cease.

This document serves as a mere guide and should not be used as the definitive and only source of information in implementing any procedures in your business and for advising clients. Your due diligence must be done.