Four out of 10 marriages end in divorce before their tenth anniversary. Irrespective of the reasons for a divorce, it is often a traumatising experience for both parties and will inevitably be a life-changing event.
Four out of 10 marriages end in divorce before their tenth anniversary. Irrespective
of the reasons for a divorce, it is often a traumatising experience for both parties
and will inevitably be a life-changing event.
Depending on the type of marriage contract, the dissolution of a marriage often
includes a sharing of assets, which may include retirement fund savings.
It is important to understand what retirement savings can be shared upon divorce,
as this will save emotional distress, time and expense. Below are some important
points about your retirement savings in the fund.
Is a claim against your retirement savings lawful?
Yes. The following legislation provides for a claim against your retirement savings:
• The Divorce Act (No. 70 of 1979) (specifically sections 7(7) and 7(8)); and
• The Pension Funds Act (No. 24 of 1956) (specifically section 37D(d)).
The fund must adhere to this legislation, and where it is ordered to do so by a court, the fund is legally required to make a deduction from your retirement savings (known as “pension interest” for the purposes of the divorce order). The fund must then pay the allocated portion of the “pension interest” to your former spouse. However, certain requirements must be met, and many people, even lawyers, get these wrong.
Who is a member spouse?
For the purposes of this note, you (the member of the fund) are referred to as the “member spouse”.
Who is a non- member spouse?
You (the member) may need to share a portion of your retirement savings with your former spouse, also known as the
“non-member spouse”.
Can my former spouse claim against my retirement savings when we divorce?
Yes, depending on how you were married.
Retirement savings are often overlooked and are not well understood when divorce proceedings take place, which can result in complications and delays when retirement funds assess a divorce order for enforceability. Spouses, when they agree on how assets will be divided on divorce, will decide whether and how to divide up their retirement savings.
For example, they may agree that one spouse will keep their retirement savings but give up the house, or they may agree that one spouse’s retirement savings will be divided, but that spouse keeps their share portfolio. Basically, retirement savings are just another asset that can be divided up as the parties agree or as ordered by a court.
Your retirement savings can be shared depending on the type of marriage contract entered into, for example:
• in community of property;
• out of community of property with accrual;
• based on customary law; or
• an Islamic marriage, provided that a settlement agreement in relation to the dissolution of the marriage is
made an order of court.
Your retirement savings will not be considered part of your assets and thus cannot be shared if:
• You were married out of community of property on or after 01 November 1984 and in terms of which the
antenuptial contract excludes community of property, community of profit and loss and the accrual system.
The idea behind the legislation is that:
• Certain retirement savings fall into assets that can be divided up upon divorce;
• The retirement fund pays the amount owing directly to your former spouse; and
• The former spouse can be paid upon divorce and does not have to wait for you to leave the fund.
What amount of my retirement savings can be divided up?
When you are agreeing to (or a court is ordering) a division of assets, the part of your retirement savings that forms part of these assets is called the “pension interest”. This is defined in legislation and is the amount that may be divided up.
Importantly, “pension interest” is the benefit you would have received from the fund if you had resigned from employment on the date of divorce. Only this amount may be divided up.
When we discuss the requirements for a valid divorce order below, you will see that it is very important to refer to “pension interest” and not to use other wording.
You and your former spouse (or the court) will decide how much of your “pension interest” in the fund will be allocated to the other spouse. This is often 50% of “pension interest”, but it can be any percentage.
“Pension interest” is the benefit you would have received from the fund if you had resigned from employment on the date of divorce.
What requirements must be met to pay out a divorce benefit to your former spouse?
Many funds receive divorce orders that they cannot action because they are incorrectly worded, which leads to further distress and expense for the parties to the divorce. All funds may only action divorce orders that are in line with the legislation.
There must be a court order
The first requirement is that there must be a court order. Without a court order, no fund may pay out “pension interest” to a former spouse. A settlement agreement on its own is not enough.
The court order must comply with the following requirements:
• The retirement fund in question must be “identifiable” from the divorce order, and there should be no doubt about which retirement fund has been ordered to pay “pension interest”. The best way to do this is to include the full registered name of the retirement fund in the divorce order. This can be found on your last annual benefit statement, and the fund’s details should be provided to your attorney. If there is more than one fund, make sure each fund is accurately named.
• The divorce order or settlement agreement must clearly stipulate that a portion of your “pension interest” has been awarded to your former spouse. This can be indicated as a percentage or rand amount of “pension interest” and must not exceed 100%. Please do not use other wording, such as “retirement savings”, “provident interest” or “interest in my pension fund”.
• The court order must expressly order the fund to pay the awarded portion of your “pension interest” to your former spouse. Without this specific order, the fund may not pay.
How will my spouse know what the value of my “pension interest” is?
The fund has a duty to protect the personal information of its members and, unless permitted by law, may not provide this information to any person other than you (that is, the member). It is therefore recommended that your former spouse requests you to obtain the value of your “pension interest” from the fund.
However, if the fund has sufficient reason to believe that divorce proceedings have commenced, the fund may accede to a request from your former spouse to provide certain minimum information relating to your membership in the fund and the value of your “pension interest”. The fund may only disclose the information necessary to give effect to legislation.
The fund may also provide information required in terms of a subpoena if requested.
When will the “pension interest” be paid out to my former spouse?
Prior to 13 September 2007, your former spouse had to wait until you had withdrawn or retired from the fund before they could claim and receive a benefit awarded by a divorce order.
However, from 13 September 2007, the “clean-break” principle was introduced, according to which your former spouse may claim their share of your “pension interest” once the divorce order has been granted; they are no longer required to wait for you to leave the fund before claiming a share of your “pension interest”.
Please also refer to the applicable timelines below.
Who will be taxed on pay-out?
You and your former spouse should be aware of the applicable tax implications on payment of a divorce benefit.
If the divorce order is dated after 13 September 2007, and if the deduction from your retirement savings was made after 01 March 2009, your former spouse will be liable for the taxation on the portion of “pension interest” paid to them. The tax payable is based on the applicable withdrawal tax tables. The fund will deduct this tax before payment is made to your former spouse.
If your former spouse chooses to transfer their allocated portion of “pension interest” to certain other funds, no tax will be payable upon transfer. In this case, the portion of “pension interest” in the hands of your former spouse will be taxed when they withdraw or retire from that fund.
Does “pension interest” earn interest or an investment return?
Yes, any “pension interest” that is awarded to a former spouse will accrue an investment return from the date of deduction (the date the former spouse elects to take cash or transfer) until date of payment to the former spouse or transfer. Before investment return can be added, however, an order must be submitted to the fund and a mode of payment must be selected by the former spouse.
Investment return is usually the interest earned in the fund’s bank account on the awarded portion of the “pension interest”.
No other interest or growth is payable.
What documents should be submitted to the fund by your former spouse?
• A completed and signed divorce claim form from the fund;
• The court order (including a relevant settlement agreement) granted by the court (each page stamped by
the court);
• A certified copy of your marriage certificate;
• A certified copy of the antenuptial contract or written confirmation by the parties as to the matrimonial
property regime if married in community of property (if your marriage regime is not stated in the court
order);
• Your former spouse’s banking details if any amount is being paid in cash;
• The details of the fund to which any amount will be transferred;
• Your former spouse’s tax number;
• Certified copy of your former spouse’s identity document.
If the divorce order is not enforceable with respect to the fund and should the divorce order subsequently be amended by the court to bring it in line with legal requirements, the following documents must be submitted to the fund in addition to the documents listed above:
• A copy of the variation order (each page stamped by the court).
What timelines are applicable to payment?
• Within 45 days of receipt of the order granted by the court, the fund must request your former spouse to
indicate how the divorce benefit should be paid.
• Your former spouse must communicate their preference to the fund within 120 days of the fund’s request.
• The fund must implement your former spouse’s preferred payment method within 60 days of receipt of your
former spouse’s communication.
• If your former spouse fails to indicate their preferred method of payment within the 120-day period
mentioned above, the fund must make payment directly to your former spouse in cash within 30 days.
• If the fund cannot make the cash payment (for example, if it does not have bank details), your former
spouse’s allocated portion of the “pension interest” will be retained in the fund until payment can be made.
The allocated portion of the “pension interest” will earn bank interest until date of payment.
What happens if my employment is terminated before the date of the divorce order?
If your employment terminated before the date of the divorce order then there is no “pension interest” in the fund and there is thus no “pension interest” (as defined in the Divorce Act) to be divided up and paid out. I f the fund receives a court order ordering it to pay out “pension interest” in these circumstances, there will be no “pension interest” to pay regardless of whether or not your benefit was actually paid out of by the fund.
In this scenario, however, the divorce order is still enforceable against you by your former spouse, even though it is not enforceable against the fund.
Did you know?
• The date of marriage has no bearing on the calculation of “pension interest”. It is not uncommon for a divorce order to award a percentage of “pension interest” to the former spouse that is to be calculated from “the date of marriage to date of divorce”. However, this does not conform to the definition of “pension interest”, which relates to specific notional fund benefits and not to the duration of the marriage.
• The fund must deduct tax from the amount of “pension interest” awarded to your former spouse before payment is made to your former spouse. Thus, the amount actually paid to your former spouse (if it is paid in cash) will be less than the amount stipulated in the order due to the tax payable to SARS.
Please obtain advice
As each individual’s circumstance is different, it is important that you and your former spouse consult attorneys familiar with the application of the Pension Funds Act. In addition, it may be worthwhile to consult a certified financial planner or your employer’s appointed employee benefits consultant to fully understand the implications that a divorce can have on your retirement savings.
Educate yourself, apply your mind and make the right choice.