Divorce financial planning: Calculating your pension interest

Of the many financial implications flowing from divorce, calculating the pension interest is undoubtedly one of the most complex. The term ‘pension interest’ 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.

In the event of divorce, the couple’s matrimonial property regime will largely determine how the assets will be divided between them and, as such, the pension interest benefit is an asset for the purposes of the division of an estate at divorce.

Regulated by the Divorce Act, Pension Funds Act and Income Tax Act, the purpose of the pension interest calculation is to allow divorcing spouses, where applicable, 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.

Defined in terms of the Divorce Act, pension interest is calculated at the date of divorce, keeping in mind that the member spouse must be a registered member of the retirement fund on the date of divorce. In the case of occupational funds (in other words, pension and provident funds), if the member spouse resigns from their employment or retires from the fund before the date of divorce, there is effectively no pension interest, and the benefit accrues to them – whereafter it will be dealt with as any other asset in the estate.

Read together with the Divorce Act, the Pension Funds Act makes provision for the deduction of a pension benefit in the event of divorce, keeping in mind that this legislation relates only to approved retirement funds including pension, provident, preservation and retirement annuity funds – and excludes compulsory annuity funds such as life or living annuities. Further, the right of a divorcing spouse to claim a share of the pension interest is very much dependent on the nature of the marital regime.

A simple summary of the application is as follows:

In community of property: Spouses share a single, joint estate and, upon divorce, each spouse has a 50% claim against the other.

Out of community excluding the accrual after 1 November 1984: Each spouse retains their own estate and there is no claim for pension interest. However, divorcing spouses may agree to a division of the pension interest by mutual consent.

Out of community excluding the accrual before 1 November 1984: Each spouse retains their separate estate and there will be no sharing of assets, except in a situation where the court orders a redistribution of assets in terms of Section 7(3) of the Divorce Act.

Out of community including the accrual: The value of the pension interest is taken into account when calculating the accrual.

When it comes to calculating the pension interest, a distinction is made between provident, pension and preservation funds, on the one hand, and retirement annuities, on the other hand. The respective calculations are as follows:

Pension, provident and preservation funds: the benefits a member of the fund would have been entitled to in terms of the scheme rules had their membership ceased on the date of divorce as a result of resignation.

Retirement annuities: The total amount of the member’s contributions to the fund up to the date of divorce, together with the total amount of annual simple interest on those contributions calculated at the prescribed rate.

Essential to the successful awarding of the pension interest benefit to a non-member spouse is the accurate wording of the divorce order and, as such, it is highly advisable that you seek the advice of an experienced divorce attorney if your divorce involves retirement fund benefits.

Any uncertainty in the divorce order can result in the pension fund administrator rejecting the settlement agreement and refusing to pay out the pension interest benefit. In such instances, the divorce settlement agreement cannot be amended by the divorcing spouses. Instead, they will be required to approach the high court for an amendment to the order which can be a costly exercise.

As such, ensure that your divorce order includes the following:

  • A specific reference to ‘pension interest’ as defined by the Divorce Act;
  • Specific identification of the actual fund in which the member spouse is invested. Merely naming the insurer or pension fund administrator is not sufficient identification, keeping in mind that the insurer or administrator may look after several 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. In doing so, the order can provide for an actual rand amount or a pre-determined percentage;
  • An instruction to the fund to make the deduction and payment to the non-member spouse, and to endorse its records accordingly.

Once the retirement fund is satisfied with the validity of the divorce order, the fund has an obligation to ask the non-member spouse how they would like to receive the benefit, with the available options being to either (i) take the full amount in cash or (ii) transfer the benefit to another retirement fund.

It is important to note that the non-member spouse does not have the option of making a partial withdrawal and transferring the balance to a retirement fund. Also, where the pension interest is housed in a retirement annuity, the non-member spouse is required to transfer the funds to another retirement annuity – and not to a pension or provident fund – where a transfer is the option.

Once the retirement fund has been presented with a valid divorce order, the fund has 45 days in which to request the non-member spouse to make a decision regarding withdrawal or transfer, following which the non-member spouse has 120 days in which to make their decision.

These critical decisions should ideally be navigated together with an experienced financial advisor, bearing in mind that there are tax implications in the event of withdrawal that need to be taken into account. Once the non-member spouse has made their selection, the retirement fund has a period of 60 days in which to implement the selection. If after 120 days the non-member spouse has not made their selection, the fund is required to pay the benefit directly to the non-member spouse, keeping in mind that such payout is subject to tax.

As mentioned above, pension interest calculation is a complex area of financial planning and, if you are going through a divorce, it makes sense to get your independent advisor involved in the process to ensure an equitable division of retirement fund assets on divorce.

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