The Pension Funds Act provides for retirement funds to offer fund members a loan, or provide a guarantee for a loan, as long as these loans are only used to buy, build or renovate a property which you, as a member of the fund, or your spouse occupy.
It is up to the trustees of your fund, however, to decide if the fund rules will provide for these pension-backed loans or for the fund to put up this security for loans that are offered by financial institutions such as banks.
These loans or guarantees are typically provided by employer-sponsored funds.
The Act sets some conditions for these loans or the security for loans, but funds and banks can set their own stricter conditions.
If your fund provides such a loan or guarantee, and the interest rate is favourable, you may be able to apply for it and use it to pay off an existing loan taken against a property. If you are taking a home loan with a bank, you may also be able to supplement that loan with a pension-backed loan.
Registered for credit
Regardless of whether the fund or a bank lends you the money, the lender must be registered as a credit 
provider under the National Credit Act and the loan must comply with this Act. This means the lender must check your income and expenses to be sure you can afford to repay the loan.
The trustees are also required to check that pension-backed loans are spent on vacant land, to buy, build or renovate a home.
If you qualify for a favourable interest rate, taking such a loan may be worthwhile, but you should try to pay it off or ensure you will qualify for a bank loan before you resign your job or retire from your employer, as your retirement savings could then be used to pay off the loan. This could have negative tax implications and reduce the amount you have to use to provide a pension in retirement.
A guarantee for a bank loan
Most retirement funds that provide pension-backed home loans do so by way an arrangement with a bank that provides the loan, while the fund guarantees that loan.
As the bank lends the money, it earns the interest from the loan. The interest rate will depend on a number of factors, but in some cases the rate may be lower than what you would get on an ordinary loan.
There is typically an arrangement with your employer to deduct the repayment from your salary, making it less likely you could default and making the loan more secure for the bank.
If you do default on the loan, some pension-backed loans will use your savings to settle the outstanding amount. However, other pension-backed loans use the property as security. On an ordinary home loan, the bank would attach your property if you defaulted.
The interest rate you pay on a pension-backed loan depends on the credit profile of the fund members and whether the property or your retirement savings are the security. Read more: What is my credit report?
If the loan is only registered against your savings in the fund, there is no need for conveyancing fees to register the loan against the title deed. This can also make the loan cheaper.
If you default on the loan and your savings are attached to repay the loan, the amount used will be regarded as a withdrawal from your retirement fund and you may be liable for tax. Only R25 000 can be withdrawn tax free from any retirement fund at any time before retirement.
If you leave the fund, you will have to negotiate a new loan or repay the loan from your withdrawal benefit. This could also incur tax.
A loan from your fund
Very few retirement funds lend you money directly from the fund.
But some that do, allow you to borrow against your own fund value and repay the loan and the interest into your own account.
Other funds lend you money from an allocated portion of the fund and the interest charged on the loans benefits all members.
The conditions
The Pension Funds Act limits how much you can borrow, depending on whether you secure the loan with a mortgage bond with your savings as a guarantee, or borrow from your retirement savings, or both.
The Act allows a maximum loan value of 90% of your savings, but most banks and other lenders only allow you borrow 60% of your savings in the fund.
If you are borrowing from your retirement savings, the Act limits the loan to the value of your savings less any tax that would be payable if you withdrew your savings.
You must be at least five years away from retirement and the term of the loan may not exceed 30 years. If the term of the loan extends beyond your retirement date, the balance of the loan remaining at retirement must be equal or less than one third of your savings which you are entitled to take in cash at retirement.
Banks and funds may set conditions relating to how much you have in your fund and how long you have been employed in order to qualify for a pension-backed loan.
Beware
If you use some of your retirement savings to pay off the loan at retirement, your pension will be lower than 
if you used all your savings to provide an income. Ideally, you should aim to pay off the loan before you retire.
If you are retrenched, dismissed or resign, the loan will be recalled and you can either settle it by taking a new loan, or you can withdraw your retirement savings to settle it. If you have to withdraw your savings to settle the loan, this could have tax implications, as you can only withdraw R27 500 tax free from any fund over your life time. It will also diminish the savings you have at retirement. Read more: Why is withdrawing from my fund a bad idea?
