Pension interest, which falls within the ambit of the Divorce Act and Pension Funds Act, is used in the context of divorce and is a notional amount based on the benefit that the member spouse would have received from their retirement fund at the date of divorce. The underlying purpose of pension interest 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 terms of the Pension Funds Act, pension interest is applicable to all retirement funds governed by the Act, including pension, provident, preservation, and retirement annuity funds, although keep in mind that the calculation can be complex and the payout can be time-consuming. In this article, we unpack 10 important things to know about pension interest calculations.
- The pension interest calculation is dependent on the type of retirement fund
The manner in which pension interest is calculated depends on the type of retirement fund you have in place. In respect of pension and provident funds, the benefits would be equal to the benefits that the member spouse would have been entitled to had they resigned or if their membership of the fund had terminated. In the case of preservation funds, the pension interest is the benefit that the member spouse would have been entitled to if they were to terminate membership from the fund or retire from the fund on the date of divorce. The pension interest in respect of retirement annuities is the sum of the member spouse’s contributions up to the date of divorce plus simple annual interest at the prescribed rate. It is important to note though that the total amount of simple interest payable may not exceed the fund return on the pension interest assigned to the non-member spouse. Note that neither the duration of the member spouse’s membership nor the duration of the marriage is of consequence when determining the pension interest claim. Further, 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.
- Your marriage contract impacts your right to a share of the pension interest
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. However, keep in mind that couples are free to agree on the division of their retirement fund benefits and to incorporate such in their settlement agreement. Also worth noting is that where couples marry with the accrual, they are able to expressly exclude their respective retirement funds from the accrual.
- Pension interest is calculated on the actual date of divorce
It is important to bear in mind that the final pension interest calculation only actually takes place on the date that the Court issues the divorce order. As such, it is difficult to have certainty as to the actual award amount prior to the finalisation of the divorce. However, it is possible to approach your retirement fund to request an estimate of the pension interest award assuming you were divorced on the date of the request.
- There is no pension interest claim in respect of living annuities
Where a member spouse retires from the fund prior to the date of divorce and uses the proceeds, or part thereof, to purchase a living annuity, the annuity does not fall within the definition of ‘pension interest, and the non-member spouse cannot claim against the annuity for a payout. This is because the nature of a living annuity is such that the annuitant has a right to the annuity income but not to the underlying capital. However, divorcing couples should keep in mind that any annuity income received should be taken into account when determining future maintenance needs. Particularly relevant where a couple is married with the accrual system is that the courts have recently found that the value of an annuity-holder’s future annuity payments should be considered an asset in the estate for accrual purposes. How that value of that asset should be determined is still sub judice and it remains to be seen how the courts will give effect to this valuation.
- If a member spouse resigns before the divorce, there is no pension interest
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 their 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 their estate and will be dealt with as part of the divorce settlement.
- The wording of the divorce order when making the award is critical
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 the court to have the wording of the divorce order rectified – an expensive, time-consuming, and frustrating process. Specifically, the order must refer to ‘pension interest’ as defined by the Divorce Act, and in the case of a preservation fund, Section 37D(6) of the Pension Funds Act must be specifically referenced. Further, the retirement fund of the member spouse must be specifically identified, and it is not sufficient to merely name the fund administrator. Clear details as to how much of the pension interest is owing to the non-member spouse and how this amount should be calculated must be included in the divorce order and, ideally, a specified percentage or Rand value of the pension interest should be stipulated. In addition, a direct instruction to the fund to make the deduction and payment to the non-member spouse and to endorse its records accordingly must be included.
- The non-member spouse must elect how to receive the funds
Once the divorce order has been issued, the non-member spouse must 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 transfers are free from tax.
- The non-member spouse is responsible for paying tax
If opting to withdraw the pension interest benefit, it is important to note that the funds will be taxed in the hands of the non-member spouse as per the retirement withdrawal tables, and any previous withdrawals made by the non-member spouse will have a bearing on how the funds will be taxed. If you’re unsure as to how you will be taxed, you can request a tax simulation from the retirement fund provider before making a final decision – as paying unnecessary taxes can have an enormous bearing on your financial position.
- The pension interest payout can take time
It is also important to know that the entire process of claiming a share of the pension interest is time-consuming, and finalising the process can take up to eight months or more. This is because the Pension Funds Act provides a set of strict timelines that must be adhered to when paying out or transferring the non-member spouse’s pension interest.
Worth knowing also is that the non-member spouse is not a member or beneficiary in relation to the retirement fund and, as such is only entitled to interest on their benefit from the date of deduction, which is effectively the date that they elect how to receive their funds. The Pension Funds Adjudicator has confirmed that the non-member spouse is not entitled to any investment returns or growth on their portion of the pension interest after the date of the divorce.
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