Ricochet News

Retirement funds and divorce

Mar 16, 2018
Retirement funds and divorce

A divorce is a highly stressful time for both parties and the last thing either party wants is for there to be complications around the allocation of retirement fund benefits.

The Divorce Act allows a non-member spouse to claim a portion of his / her spouse’s accrued savings in a retirement fund as part of the divorce settlement. The retirement fund can be instructed to either immediately pay or reserve the proportion or amount of the member’s accrued savings payable to the non-member spouse that the parties agreed upon for later payment to the non-member spouse.

There are certain conditions, however, that have to be met in order for a divorce order to be binding on a retirement fund.

The conditions that a divorce order have to comply with to be binding on a retirement fund can be summarised as follows:

1.  There must be a valid decree of divorce (divorce order) granted by a court (High Court, Regional Court or Divorce Court).

2.  The member against whose retirement benefit is being claimed must still be a member of the retirement fund on the date that the divorce order is granted.

3. The retirement fund against which the order is granted must be identified or identifiable in the divorce order.

4. The divorce order must specify that the member’s pension interest is assigned to the non-member spouse and must specify the proportion or amount thereof that is assigned to the non-member spouse.

5.  If so required, the divorce order must order the retirement fund to make immediate payment of the agreed proportion or amount of pension interest to the non-member spouse or must order the retirement fund to adjust its records to reflect the claim of the non-member spouse to be settled when the member eventually exits the retirement fund.

If any of these conditions are not met, the divorce order may not be binding on the retirement fund.

Jaco Pretorius, CEO of Ensimini Financial Services, says that although the introduction of the clean-break principle in 2009 has significantly changed the way retirement fund benefits can be divided upon divorce and has introduced clear, practical processes to facilitate this, many divorcees continue to find themselves having to spend time and money approaching courts to remedy poorly-worded divorce orders that are not binding on their, or their former spouses’, retirement funds.

“As consultants and administrators of retirement funds, we regularly have to deal with divorce orders that affect the retirement fund benefits of the divorcees and unfortunately the vast majority ‘do not pass muster’ due to poor drafting of the divorce order,” he says.

These unenforceable divorce orders are then referred back to the member and non-member spouse to bring applications to the relevant court to rectify the bad drafting of the divorce order, which invariably leads to delays and additional costs to the parties.

Pretorius says the three most common problems they experience with divorce orders are:

Firstly, divorce orders that state that the non-member spouse is entitled to a portion of the member’s “provident interest” or “pension or provident fund”. “This should refer to “pension interest” irrespective of whether the retirement fund is a pension fund or a provident fund. Pension interest is in effect the member’s withdrawal benefit on the date of divorce.

Secondly, where claims are made against multiple retirement funds to which a divorcee belongs and the divorce order simply refers to the funds to which the member belongs.  Pretorius says divorce orders need to be highly detailed. He says it is important that the name of each of the retirement funds be explicitly mentioned as well as the proportion or amount of the pension interest in each retirement fund that is due to the non-member spouse.

Finally, if the divorce order fails to contain an order to the fund to make payment to the non-member spouse, the retirement fund will not be able to make payment to the non-member spouse until the member withdraws from the retirement fund for whatever reason.

Did you know?

•  Contrary to popular belief, the non-member spouse is not automatically entitled to 50% of the member’s pension interest. The parties may agree on any proportion of the pension interest (i.e. between 0% and 100%) or even an agreed fixed amount to be allocated to the non-member spouse. It is, however, critical that the proportion or amount be specified in the divorce order.

•  If a retirement fund transfers the benefit of a member to another retirement fund before a valid divorce order is served upon it in respect of such a member, the retirement fund to which the transfer was made will be required to give effect to the provisions of the valid divorce order. This would apply to both section 14 transfers and a transfer based on a recognition of transfer.

•  A member who has emigrated and subsequently divorces in that country must apply to a South African court to have the divorce order recognised and enforced in South Africa. This is particularly true if the non-member spouse wants to claim a share of the former spouse’s retirement savings.

•  In terms of income tax, current legislation requires the non-member (ex) spouse to pay any tax due on his/her portion taken as a cash lump sum if the divorce order was granted after 13 September 2007 and the deduction was made from the member’s pension interest after 1 March 2009. Any transfer to another approved retirement fund will not attract tax at the time of transfer.

• The same tax regime applies to public sector funds and both spouses are to retain the tax-free benefits of the member’s pre- 1 March 1998 years of service.

“In order to avoid many of the pitfalls outlined above it is extremely important to ensure that you obtain advice from a suitably competent legal advisor when drafting a divorce agreement,” concludes Pretorius.