Divorce can be a traumatic and painful experience. There are many factors to consider, and unfortunately, the implications of divorce on retirement funds are often overlooked. In this article, we highlight some important points about the impact of divorce on retirement funds.
The Divorce Act (No. 70 of 1979) sets out the requirements for a valid divorce order. We will look at those requirements in more detail below.
The Pension Funds Act (No. 24 of 1956) provides for certain deductions that may be made to retirement funds, including in the case of a divorce.
Whether your retirement fund will be taken into account at divorce will depend on how you were married. For example, if you were married out of community of property on or after 1 November 1984 and your antenuptial contract excludes community of property, community of profit and loss, and the accrual system, your retirement funds cannot be shared.
Recent case law actually states that a non-member spouse may be automatically entitled to retirement fund benefits (where married in community of property). The divorce order, however, still has to comply with requirements in legislation to be able to make a deduction.
Where you are married out of community of property with accrual, or in community of property, you and your spouse can, as part of your divorce settlement, agree how and if retirement funds will be shared. For example, you may agree that your spouse can keep the house, but you will be allocated the full pension interest in your spouse’s retirement fund(s).
It is of vital importance to make sure you make use of lawyers who are experts in divorce law. However, it is just as important to make sure that those lawyers understand the legislation that applies to retirement funds as it relates to divorce. We often see divorce orders and settlement agreements that do not comply with the requirements of legislation in respect of retirement funds.
The divorce order must specifically refer to ‘pension interest’. It must also be clear in the order what percentage of the pension interest is awarded to the non-member spouse or alternatively, what amount is assigned to the non-member spouse.
If the divorce order states that the non-member spouse is entitled to 40% of the member’s pension interest, then this requirement will be met. If the divorce order states that the non-member spouse is entitled to 40% of the member’s provident interest or 40% of the member’s pension fund, then this requirement will not be met. The words ‘pension interest’ are vital to make the order binding.
The retirement fund must be named, or at least be identifiable from the divorce order.
If the divorce order refers to ‘the fund to which the member belongs as at the date of divorce’, then this requirement will not be met. If the fund is not named at all but a membership number is referenced which makes the fund identifiable, then this requirement will be met.
The retirement fund must be specifically ordered to pay the amount or percentage of the pension interest to the non-member spouse. If the divorce order states that:
then this requirement will be met.
If the divorce order states that the member must make payment to the non-member spouse, then this requirement will not be met.
By way of example, a valid divorce order that will be binding on the retirement fund, could state something like the following:
The meaning of pension interest is different, depending on the type of retirement fund. Where the fund is a pension fund, pension interest will be the benefit the member would have been entitled to had they resigned on the date of divorce. Where the fund is a retirement annuity fund, pension interest will be the value of contributions made to the fund as at the date of divorce, plus annual simple interest (at the official prescribed rate).
Pension interest in relation to a preservation fund is the benefit the member would have been entitled to had their fund membership terminated, or had they retired from the fund on the date of divorce. Note that the spouse must be an active member of the relevant fund, otherwise there will be no pension interest.
Where a portion of pension interest in a retirement fund is allocated to a non-member spouse (i.e. the spouse who is not the member of the fund), the non-member spouse may elect to:
Should the non-member spouse elect to receive the pension interest as a lump sum, they will be taxed on it in accordance with a special ‘withdrawal tax table’. A transfer to a retirement fund in their own name is done on a tax neutral basis.
It is also important to note that there are no tax consequences for the member of the relevant retirement fund.
From 1 September 2024, the two-pot retirement system will come into effect. From that date, new contributions to retirement funds will be split into two separate pots – a savings component and a retirement component. Benefits that accrue prior to 1 September 2024 will be preserved separately in a vested component.
Pension interest allocated to a non-member spouse in a divorce order granted from 1 September 2024 will be taken proportionately from all three components of the member’s retirement fund. This will not impact the options available to the non-member spouse, i.e., a lump sum or transfer to a retirement fund in their name.
We frequently receive queries in relation to divorce orders where a portion of the living annuity capital, or a portion of the living annuity income has been awarded to one of the parties. Many court cases have been decided on this issue but the most recent one is the Supreme Court of Appeal case of Montanari v Montanari. In this case, the Supreme Court of Appeal confirmed that the capital of a living annuity does not belong to the annuitant – it belongs to the life company that issues the policy. The annuitant only has a right to the annuity income. Therefore, the living annuity capital cannot be shared or split on divorce. The court did mention that the future right to annuity income may be taken into account for the purposes of calculating the accrual claim.
The above discussion highlights some of the complexities when it comes to divorce orders and retirement funds. There are many financial factors to consider when contemplating divorce. We therefore stress the importance of consulting a qualified financial advisor for comprehensive guidance on your options and their implications.