Divorce can be a traumatic and life-altering experience with wide-ranging social and financial implications. Lebona Khabo discusses entitlement when it comes to your retirement savings.
Depending on your matrimonial property regime (in community of property, out of community of property including accrual or out of community of property excluding accrual), there may be a sharing of assets you own individually or jointly when you get divorced. One asset that may be included in this division is your retirement savings, which may have been accumulated over a long period of time.
A retirement fund is a long-term investment that is meant to take care of your financial needs once you stop working. Therefore, the applicable laws are intended to ensure that access to these benefits is restricted until you reach retirement age. The Pension Funds Act (PFA) is highly prescriptive about when and how retirement benefits may be accessed by a member, for example, section 37A expressly states that a retirement benefit may not be ceded, transferred, or attached by a creditor. However, the PFA does allow for limited situations when a deduction may be made from a pension benefit, and one such exception is a “pension interest” deduction in terms of section 7(8) of the Divorce Act.
What is your spouse entitled to?
Prior to 2007, a former spouse had to wait until a member left or became entitled to a benefit from the fund before they could claim a portion of the retirement benefit. As a result, in many instances the non-member spouse would have to wait years to receive his/her share of the benefit. Following several court challenges, the legislature introduced the “clean break principle”, which allowed for the non-member spouse to receive their share of the benefit, referred to as “pension interest”, at divorce.
What is pension interest?
Pension interest is a notional amount based on the benefit you would have received had you retired from the retirement fund on the date of divorce. It is therefore calculated as at date of divorce and does not consider the duration of the marriage or whether you were married when you first became a member of the retirement fund. Pension interest is defined in the Divorce Act, and a distinction is made 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). Pension interest is defined as follows:
- Retirement annuity fund: The total amount of a member’s contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date, calculated at the same rate as the prescribed rate of interest (3.5% + repo rate).
- Retirement fund (excluding retirement annuity fund): The benefits a member would have been entitled to in terms of the rules of that fund if her/his membership of the fund ended on the date of the divorce due to resignation.
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 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.
Does pension interest apply to all matrimonial property regimes?
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.
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 accrual must pay the difference between her/his accrual and the accrual of the spouse with the smaller accrual to the spouse with the smaller accrual. It is important to consult with a lawyer and financial planner before deciding which matrimonial property regime is best suited for your and your spouse’s needs.
A pension interest benefit is an asset for the purposes of the division of an estate at divorce. In terms of the Divorce Act, a retirement fund may only make a pension interest deduction in terms of a divorce order granted by a South African court. The Divorce Act further confirms that pension interest deductions do not apply to marriages entered into out of community of property excluding accrual that were entered into after 1 November 1984.
Therefore, you must have been married:
- In community of property
- Out of community of property with accrual
- Out of community of property without accrual before 1 November 1984.
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.
What should the court order say?
Keep it short and simple. A divorce order must:
- Ensure that the retirement fund is identified or identifiable (e.g. “the Allan Gray Retirement Annuity Fund”).
- Provide that the non-member is entitled to “pension interest”. An order that refers to “interest”, “full value” or ”retirement interest”, may be invalid.
- Provide for the pension interest amount or percentage that must be paid to the non-member (e.g. “50% of pension interest”).
- Instruct the retirement fund to make the pension interest deduction.
The parties agree that the Plaintiff is entitled to 50% of the Defendant’s pension interest in the Allan Gray Retirement Annuity Fund (“the Fund”), and the Fund is instructed to pay the benefit in terms of the provisions of the Pension Funds Act.
The provisions relating to how the payment must be made are set out in the legislation. It is therefore unnecessary to include them in the wording of the order. There is also no need to reference the legislation, but you may say, “50% pension interest in terms of section 7(8) of the Divorce Act”.
What are the non-member spouse’s options?
Once the retirement fund receives and approves the divorce order, the non-member spouse may either elect to take the benefit as a cash lump sum, or to have the benefit transferred to another approved retirement fund. It is important to note that pension interest in a retirement annuity fund may only be transferred to another retirement annuity fund. If the order is against more than one retirement fund (e.g. the Allan Gray Retirement Annuity Fund and the Allan Gray Pension Preservation Fund), the non-member may make different elections per fund.
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.
What about living or life annuities purchased with retirement benefits?
Pension interest deductions only apply to retirement funds and do not apply to compulsory annuities, such as living annuities. Once a member has exited the fund, the pension interest in the retirement fund no longer exists. Despite the annuity policy not being a consideration for pension interest, a recent court judgement held that the future value of annuity income forms part of the policyholder’s estate and must be included when calculating the accrual for a marriage out of community of property with accrual. However, the court did not confirm how the value must be calculated and did not grant an insurer the right to deduct the value from the capital underlying the policy. Hopefully over time further clarity will be provided by the courts on how this value should be calculated.
We are here to assist
If you are in the process of a divorce, ensure that the wording of the court order and settlement agreement is in line with legal requirements. If the order is granted and the wording is not competent, the fund will not be able to give effect to the order. This will require the court to formally amend its original order, which is a lengthy and costly exercise. Before a court order is granted and finalised you may send the draft order and/or settlement agreement to firstname.lastname@example.org, and we will confirm whether the wording is acceptable.