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Divorce and your retirement savings

Although the official statistics for South Africa’s divorce rate during COVID-19 are yet be released, StatsSA, in its 2019 Marriages and Divorces report, found that the divorce courts processed 23,710 divorces. Globally, the pandemic sent divorce rates soaring by up to 30% or more during 2020. According to DIY Legal, South Africa ranks in 83rd place out of 154 countries for divorce.

“An issue that is often overlooked in the process leading up to divorce, but equally messy to navigate, is what the implications of such a decision are on a couple’s financial affairs,” says Jaya Leibowitz, senior legal adviser at Allan Gray.

This is echoed by Suzean Haumann, CFP®, head of Brenthurst Wealth Tygervalley: “A critical issue is the separation and division of joint finances, especially regarding retirement and pension funds.”

The regulatory aspect

Haumann points out that the Divorce Act was amended in 1989 to make provision for the division of ‘pension interest’ between parties of a divorce (excluding those married out of community of property without the accrual system). “At that time, the non-member spouse had to wait until the pension benefit accrued to the member before he/she could get their share – no growth accrued on that amount.)”

She also draws attention to the ‘clean break’ concept that was introduced in the Pension Fund Act through the amendment of Section 37D(1)(d) (effective 13 September 2007) to allow a retirement fund to deduct from the member’s benefit or minimum individual reserve:

  • any amount assigned to a non-member spouse in terms of a divorce order granted under the Divorce Act, and
  • employee’s tax required to be deducted or withheld as per the Income Tax Act.

“A further amendment was made in 2008 to make the ‘clean break’ applicable to all divorce orders granted after 1989. The amount allocated to the non-member spouse has to be paid to that person or to an approved retirement fund of his/her choice,” Haumann underlines.

The “pension interest” deduction

Leibowitz explains that a ‘pension interest’ deduction allows a non-member spouse to be eligible for a pension benefit from the member spouse’s pension from the date of divorce. “It doesn’t take into consideration the duration of the marriage or whether you were married when you first became a member of the retirement fund.”

A pension interest distinguishes between pension interest in a retirement annuity fund, and pension interest in any other retirement fund (e.g. a pension fund, provident fund, pension/provident preservation fund).

“It is therefore important to be aware that a 100% pension interest deduction from a retirement annuity fund may not be the full value in the fund. Furthermore, if a member has multiple accounts in a retirement fund, pension interest is calculated at fund level and not at account level. The divorce order must therefore refer to the fund and not an individual account. However, the member may elect which account in the retirement fund the pension interest deduction must be made from,” says Leibowitz.

Does pension interest apply to all matrimonial property regimes?

Leibowitz explains that the three different matrimonial property regimes in South Africa are 1) marriage in community of property, 2) marriage out of community of property without accrual, and 3) marriage out of community of property with accrual. “The default, if you marry without concluding an antenuptial contract, is a marriage in community of property. In this regime, you and your spouse each own 50% of the assets and liabilities in the estate (joint estate), and upon divorce each spouse has a 50% claim against the other,” she says.

“If you do not want to have a joint estate you must conclude an antenuptial contract, either with or without accrual.” If without accrual, each spouse keeps their own assets and there is no claim against the other’s assets. If accrual is included, at divorce, the spouse with the larger estate (assets less liabilities) must pay the difference between her/his estate and the estate of the other spouse with to the spouse with the smaller estate. “Importantly, if you are married out of community of property without accrual after 1 November 1984, your spouse has no claim for pension interest from your retirement savings.”

The legal aspect

“For a claim to be successful against a spouse’s retirement fund, that spouse must be a member of the fund on the date of divorce,” Haumann stresses. “Therefore, where a spouse resigned from his/her employer prior to the date of divorce and their employment contract ceased, there can no longer be a claim against that spouse’s pension or provident fund as they are no longer a member of the fund.”

“The Divorce Act clearly states that the pension interest is only included in the divisible assets when dealing with marriages in community of property and marriages that are out of community of property with the inclusion of the accrual. It does not provide for out of community of property where the accrual is not included and therefore divorce orders issued in respect of these marriage formalities cannot be actioned by the fund, according to Haumann.

Who is responsible for the tax?

“In terms of the provisions of the Income Tax Act, if the non-member spouse elects to take a cash lump sum, the benefit will be taxed in his/her hands. However, if the benefit is transferred to another retirement fund, the benefit will be transferred tax-free. When the non-member retires or withdraws from that retirement fund, he/she will be liable for tax on the retirement or withdrawal benefit,” Leibowitz explains.

“Where the funds are from the GEPF, the pre-98 tax-free amount will apply to the non-member spouse’s share of the benefit, proportionately,” Haumann adds. She also notes that if a withdrawal is chosen by the non-member spouse the tax implications will also have an effect on their own personal retirement funds and possible future retirement withdrawals upon their own retirement.

Divorce can be daunting and overwhelming. Financial Advisers play a huge role in gauging the impact of divorce on their client’s whole financial picture.

Click here to read Haumann’s article that also highlights the importance of wording in the divorce order as well as implications where the member has emigrated.

Click here to download the Allan Gray media release that also reflects on living or life annuities purchased with retirement benefits.

Related Moonstone articles:

Living Annuities and divorce – Supreme Court of Appeal overturns High Court ruling

Divorce and wills – Why it is necessary to review will after the event

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