Retirement savings represent a significant portion of a couple’s assets, and how these are divided on divorce can greatly affect both parties’ future financial security. It’s crucial to approach this aspect of the divorce with the same care and attention as other marital assets, to avoid unintended financial strain down the line.
Recent data from Statistics SA underscores how common divorce has become in South Africa, with a staggering 11% rise in divorces recorded for 2022. In total, 20 196 divorce filings were processed, equating to about 33 divorces per 100 000 residents. Significantly, four in 10 of these divorces occurred in marriages that had lasted less than a decade, with the majority – more than 80% – involving first-time marriages.
Amid the emotional and logistical challenges of divorce, one aspect is often overlooked but can have long-lasting consequences is the division of retirement benefits. Failing to address this properly during the divorce process can lead to financial difficulties that linger for years after the papers are signed.
Salome Young, senior legal counsel at Ninety One, emphasises the importance of understanding the impact of divorce on retirement funds.
“Divorce can be a traumatic and painful experience. There are many factors to consider, and unfortunately, its implications on retirement funds are often overlooked,” Young says.
Young shares her insights on navigating this complex aspect when it comes to divorce.
What legislation governs divorce orders as they relate to retirement funds?
The Pension Funds Act (PFA) provides for certain deductions that may be made to retirement funds, including in the case of a divorce. The Divorce Act sets out the requirements for a valid divorce order.
Will your spouse have an automatic claim against your retirement fund?
Whether your retirement fund will be considered at divorce depends 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 states that a non-member spouse may be automatically entitled to retirement fund benefits (where married in community of property), provided the divorce order complies with the required legislation.
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.
What wording must the settlement agreement or order of court contain to be valid in relation to retirement funds?
It is of vital importance to use 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.
What is required for a divorce order to be binding on a retirement fund?
The divorce order must specifically refer to “pension interest” to make the order binding. It must also be clear in the order what percentage of the pension interest is awarded or 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, this requirement will be met. However, 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, this requirement will not be met.
Second, the retirement fund must be named, or at least be identifiable from the divorce order. For example, if the divorce order refers to “the fund to which the member belongs as at the date of divorce”, this requirement will not be met. If the fund is not named at all but a membership number is referenced that makes the fund identifiable, this requirement will be met.
In addition, the retirement fund must be specifically ordered to pay the amount or percentage of the pension interest to the non-member spouse. This requirement will be met if the divorce order states that:
- the fund must pay the non-member spouse; or
- payment must be made in terms of section 37D of the PFA or section 7(8) of the Divorce Act; or
- the fund must make an endorsement in its records in accordance with section 7(8) of the Divorce Act.
If the divorce order states that the member must make payment to the non-member spouse, this requirement will not be met.
By way of example, a valid divorce order that will be binding on the retirement fund could state the following:
- The parties record that the defendant is a member of the AAA Pension Fund (“the fund”).
- The parties agree that the plaintiff shall be entitled to …… % of the defendant’s pension interest in the fund, as defined in section 1 of the Divorce Act 70 of 1979. (Note: if the fund is a preservation fund, it should read “as defined in section 37D(6) of the Pension Funds Act 24 of 1956”.)
- The parties further agree that the fund be ordered to effect payment or transfer of the assigned portion of the pension interest to the plaintiff in terms of the provisions of section 37D(4) of the Pension Funds Act 24 of 1956.
What is pension interest?
The meaning of pension interest differs depending on the type of retirement fund.
In the case of pension funds, pension interest will be the benefit to which the member would have been entitled if the member had resigned on the date of divorce.
For retirement annuity funds, 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).
In the case of a preservation fund, pension interest is the benefit to which the member would have been entitled to if the member’s fund membership terminated, or if the member had 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.
What are the options for the non-member spouse?
Where a portion of pension interest in a retirement fund is allocated to a non-member spouse, the non-member spouse may elect to:
- take the portion allocated to him or her as a lump sum; or
- transfer the portion allocated to him or her to a retirement fund in his or her name.
If the non-member spouse elects to receive the pension interest as a lump sum, he or she will be taxed in accordance with the withdrawal benefit tax table. A transfer to a retirement fund is tax neutral. It is also important to note that there are no tax consequences for the member of the relevant retirement fund.
What about living annuities and divorce?
There have been many court rulings involving 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. The most recent one is the Supreme Court of Appeal (SCA) case of Montanari v Montanari.
In this case, the SCA confirmed that the capital of a living annuity does not belong to the annuitant but 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 considered for the purposes of calculating the accrual claim.
“There are many financial factors to consider when contemplating divorce, so we stress the importance of consulting a qualified financial adviser for comprehensive guidance on your options and their implications,” advises Young.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute legal, financial planning, estate planning, or investment planning advice that is appropriate for every individual’s needs and circumstances.
