The introduction of the two-pot retirement system in September 2024 has brought a major shift in how retirement savings are treated during divorce – fundamentally changing the rights of divorcing fund members and their spouses.
Under the new system, pension interest is calculated based on a member’s fund value across three components – the savings, retirement, and vested components – rather than the old formula used in the Divorce Act. This means that when a divorce settlement includes splitting a pension interest, the amount must be deducted proportionally from all three components.
Importantly, the new rules extend protection and rights to spouses who previously had no claim – including those whose partners are paid-up or deferred members, or even in-fund pensioners. Retirement funds must also block any withdrawals from the savings component if divorce proceedings have begun, unless both parties give written consent, to protect the non-member spouse’s potential claim.
With South Africa’s divorce rate climbing – 22 230 divorces were finalised in 2023, a 10.1% increase from the previous year, according to Statistics South Africa – these changes have far-reaching financial implications. Divorce settlements are now more closely tied to the realities of a member’s current retirement fund value, ensuring a fairer, more transparent division of assets.
Allan Gray’s senior legal adviser, Reo Emmett, unpacks how the two-pot system has reshaped the treatment of retirement savings in divorce and what divorcing fund members and their spouses should know.
Most divorce after the age of 40
Data from Statistics SA shows that many divorces occur within the first decade of marriage, with the median ages being 46 for men and 42 for women. Interestingly, younger than 45 were more likely to seek divorce than men in the same age range. However, the trend reverses among older age groups, with more men divorcing after 45.
“Most divorces occur after the age of 40, and this is typically when investors start ramping up their retirement saving efforts. Divorce can lead to major financial setbacks in retirement, especially if it occurs during the crucial period of accumulating retirement savings,” says Emmett.
New definition of pension interest
Emmett says two pieces of legislation interplay when it comes to divorce and your retirement fund investments: the Divorce Act and the Pension Funds Act (PFA).
“If you are a member of a retirement fund, your pension isn’t like cash in the bank – it technically belongs to the fund until you retire. But the Divorce Act allows a non-member spouse to claim a share of it in certain types of marriages.”
He explains that this typically applies to couples married in community of property or out of community of property with accrual. “If you are married out of community of property without accrual – especially after 1984 – your non-member spouse can’t claim a share of your pension,” says Emmett. “And even if both parties agree to split it, the fund can’t enforce it because the law does not allow for it.”
Emmett says the two-pot system has introduced a new definition of pension interest, which is more flexible than what is contained in the Divorce Act and ensures that pension interest is based on real fund value at account level.
He adds that the two-pot rules include benefits for the spouses of people who are no longer contributing – such as paid-up or deferred members, and even in-fund pensioners. “Previously, if you left your job before the divorce, your spouse couldn’t claim anything, even if money was still sitting in the fund. This has now changed.”
Divorce claims and savings withdrawal benefits
Emmett explains that under the two-pot framework, since 1 September 2024, all contributions made to retirement funds are split as follows: one-third is allocated to a savings component and two-thirds to a retirement component. If you were a member of a retirement fund before 1 September 2024, your existing savings (less an amount used to seed your savings component) have been put into a vested component.
“This restructuring has significant implications for how pension interests are calculated and divided during divorce proceedings,” says Emmett. “If a divorce settlement includes a pension interest split, the deduction must be made proportionately from all three components, as set out in the tax rules.”
He gives an example: “If the total pension interest is R900 000 and half is awarded to the non-member spouse, R450 000 would be split across the components proportionally – not just taken from one.”
Importantly, Emmett notes, couples cannot choose which part of the fund the money should come from. “Even if the divorce order says otherwise, the fund is legally required to deduct the amount proportionally. However, the member can still decide which portfolios the deduction comes from. If they don’t specify, it’ll be split across all portfolios automatically.”
Savings withdrawal benefits are also impacted by divorce. “Under the two-pot system, members can withdraw from their savings component once a year – as long as the amount is more than R2 000,” says Emmett. “But things change if you’re going through a divorce.”
He explains that retirement funds are not allowed to pay out a savings withdrawal if there is proof that divorce proceedings have started or if a court application for asset division has been made. “This rule is there to protect the non-member spouse’s potential claim,” Emmett says. “If both spouses agree, though, the fund can go ahead with the withdrawal – but consent must be clearly given.”
A valid divorce order: two options for a non-member
Emmett says that for a retirement fund to give effect to a divorce order, the order must be valid, meaning it needs to comply with specific requirements set out in the Divorce Act and the PFA. When a retirement fund receives a valid divorce order, the non-member spouse has two options: take the payout as a lump sum or transfer it to another approved retirement fund. However, there are several technical nuances that apply when it comes to tax calculations, deductions, and the transfer of benefits.
“When going through a life-changing event such as divorce and its impact on your finances, it is always a good idea to speak with a financial adviser to help navigate the complexities,” he says.
Disclaimer: This article provides information of a general nature and should not be regarded as legal advice or financial planning advice that is appropriate for every individual’s needs and circumstances.
