Calculating the pension interest on divorce

Retirement funds and property generally rank as a couple’s most valuable assets and yet, when it comes to divorce, it remains surprising how much time couples spend fighting over the smaller stuff. Further, given the complexity of calculating pension interest claims in a divorce, it is alarming that many couples fail to seek expert advice to ensure that their interests are protected and the divorce order in respect of their pension interest claim is actionable. Here, we unpack the complexities of claiming a share of your member spouse’s pension interest on divorce and what it actually entails.

Applicable retirement funds

‘Pension interest’, which falls within the ambit of the Divorce Act read together with the Pension Funds Act (PFA), is applicable to all retirement funds governed by the PFA. Remember, the term ‘pension’ is a generic term used to describe all approved retirement funds, but can also be used specifically when referring to a group pension fund, which is a form of occupational retirement fund i.e. membership of the fund is as a consequence of your employment. ‘Pension interest’ is also applicable to provident and preservation funds, as well as retirement annuity funds which are individual investment vehicles. Pension interest claims do not apply to life or living annuities. This is because, once a member has left the fund, the pension interest in a retirement fund no longer exists.

Understanding the definition of ‘pension interest’

‘Pension interest’ is a notional or theoretical amount based on the benefit that a spouse who is a retirement fund member have accumulated at the date of divorce. The purpose of the pension interest calculation is to allow divorcing spouses to share in each other’s retirement benefits at the date of divorce without having to wait for formal retirement to receive their share of the asset. In order for a non-member spouse to have a claim, the member spouse must be a member of the retirement fund on the actual date of divorce. This means that if a member spouse resigns from employment or retires from his pension or provident fund before the divorce is finalised, there is effectively no pension interest. In such circumstances, the retirement fund benefit received by the member spouse will form part of his estate and will be dealt with as part of the divorce settlement. Neither the duration of the member spouse’s membership nor the duration of the marriage is of consequence when determining the pension interest claim. Where both spouses are members of a retirement fund, each spouse can claim a share of the pension interest from the other spouse in a divorce.

The impact on marital regimes on the right to claim

The right of a non-member spouse to claim a share of the member spouse’s pension interest is dependent on the couple’s marital regime as this sets out the financial consequences of their marriage. Remember, the Divorce Act makes it clear that ‘pension interest’ applies only to marriages in community of property and marriages with the accrual system and is expressly excluded where couples are married after 1 November 1984 without the accrual. The table below provides a summary of how one’s marriage contract affects the pension interest claim:

Marital regime Pension interest claim Note
In community of property Yes The retirement fund benefit forms part of the joint estate, to which the non-member spouse is entitled to 50%
Out of community with the accrual Yes Value of pension interest will be included for the purposes of calculating the accrual
Out of community without accrual after 1 November 1984 No Accrual is expressly excluded and neither spouse has a claim
Out of community without accrual before 1 November 1984 No Except in circumstances where the court specifically grants a redistribution of assets in terms of Section 7(3) of the Divorce Act
Calculating the pension interest

The manner in which pension interest is calculated depends on the type of retirement fund. By way of summary, the following calculations apply:

  • Pension, provident and Preservation funds: The benefit that the member spouse would have been entitled to if she were to resign or terminate membership from the fund on the date of divorce.
  • Retirement annuities: The sum of the member spouse’s contributions up to the date of divorce plus simple annual interest at the prescribed rate.
The importance of the divorce order

One of the most important factors when claiming a share of the member spouse’s pension interest is to ensure that the wording of the divorce order meets all the legal requirements to ensure that the fund administrator can action the claim. Any uncertainty, unclear wording or omissions can result in the divorce order being defective which, in turn, may require that the couple applies to court to have the wording of the divorce order rectified – an expensive, time-consuming and frustrating process. Specific requirements include:

  • A specific reference to ‘pension interest’ as defined by the Divorce Act. In the case of a preservation fund, Section 37D(6) of the Pension Funds Act must be specifically referenced.
  • Specific identification of the actual fund in which the member spouse is invested. Merely naming the fund administrator is not sufficient, keeping in mind that a pension fund administrator could be responsible for administering a number of retirement funds.
  • Clear details as to how much of the pension interest is owing to the non-member spouse, and how this amount should be calculated. Ideally, a specified percentage or Rand value of the pension interest should be stipulated in the divorce order so as to avoid any confusion.
  • A specific instruction to the fund to make the deduction and payment to the non-member spouse, and to endorse its records accordingly. An order which stipulates that the member must make payment to the non-member spouse will be found defective.

Remember, a defective divorce order can be rectified by mutual agreement between the divorcing spouse, and it the matter will need to be referred back to court for an amended order.

The non-member spouse’s options

Generally speaking, the non-member spouse will provide the retirement fund administrator with a copy of the divorce order, following which a strict set of timelines must be adhered to by the administrator and the non-member spouse. Once it is found that the divorce order meets the stringent requirements of the Divorce Act, the non-member spouse has the option to either withdraw the funds in cash or transfer them to another approved retirement fund. The non-member spouse does not have the option of making a partial withdrawal while transferring the balance to a retirement fund. Further, where the pension interest emanates from a retirement annuity and the non-member spouse elects to transfer to another fund, the funds must be transferred to another RA, keeping in mind that all transfer are free from tax. Where the non-member spouse elects to withdraw the funds, note that the money will be taxed as per the retirement withdrawal tables.

Timeline for payout by administrator

As mentioned above, Section 37D(4)(b) of the Pension Funds Act provides strict timelines which should be adhered to when paying out or transferring the non-member spouse’s pension interest. These include:

  • Once the court order has been submitted to the fund, the fund must within 45 days ask the non-member spouse whether they wish to withdraw the money from the fund or transfer to another retirement fund.
  • Upon receipt of this notification, the non-member spouse has 120 days to inform the fund in writing of their selection. If they elect to make a withdrawal, they are required to provide the fund with details of where the payment should be made. On the other hand, if they elect to transfer the funds to another retirement fund, details of this fund must be provided.
  • Once the non-member spouse has made a selection, the fund has 60 days to pay or transfer the funds accordingly.
  • If the non-member spouse fails to make a selection, the fund must pay the money directly to the non-member spouse within 30 days after the 120-day period has expired.

As is evident from the above, claiming a share of your spouse’s pension interest in the event of divorce is complex and highly-regulated, and our advice is always to seek advice from an independent financial adviser before proceeding with your divorce application. This is a highly technical area of financial planning and requires expertise in pension fund, tax, divorce and estate planning legislation.

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