Understanding the economic impact of divorce

Divorcing couple

Divorce can be a profoundly stressful life event that invariably results in heightened emotions even in seemingly amicable situations. However, emotional impulses can lead to costly financial choices, jeopardising future financial security. Fighting on principle or seeking vengeance through protracted litigation drains finances and can lead to sub-optimal outcomes for both spouses. Managing one’s emotions during a divorce process is crucial and our advice is to partner with an impartial financial advisor who can provide clarity amidst the emotional turmoil.

The benefits of seeking financial advice before signing the divorce settlement

While many people seek legal advice before filing for a divorce, very few take steps to obtain independent financial advice before doing so. Agreeing to a divorce settlement without understanding how it will impact your financial future is never advisable. While the proposed settlement may appear attractive on paper, how does it translate for you financially? What retirement funding shortfall will you be left with? To what extent will you need to cut back on your living expenses? How does the settlement agreement impact your tax situation? Before putting pen to paper, be sure to seek advice from an independent financial advisor who can paint a clear picture of your financial future.

Understanding your rights to a share in the pension interest

If you are awarded a portion of your spouse’s pension fund interest in terms of the divorce settlement, it is of the utmost importance that the wording of the divorce order is correct. Incorrect or incomplete wording can result in the retirement fund refusing to pay out the pension interest. Bear in mind that if you are married in community of property, the non-member spouse will be entitled to claim 50% of the member’s pension interest as at the date of divorce. On the other hand, if you are married with the accrual system, your spouse’s pension fund value will be taken into account to determine the value of their estate as part of the accrual calculation. In order to ensure that you have a valid claim for your share of the pension fund interest, your divorce order must specifically name the retirement fund (or funds) in the divorce order, and not just the name of the fund administrator. The order should also specify the amount that must be paid to you, and the instruction must be for the fund (and not the member) to pay over the interest.

Appreciating the tax consequences of withdrawing capital

If you have been awarded capital as part of your divorce settlement, you’ll likely want to take steps to protect and grow this capital. If you’re awarded a portion of your spouse’s pension interest, you have the option to withdraw the funds (subject to the withdrawal tax tables) or transfer them into a retirement fund in your own name. Before withdrawing any capital, ideally, consult with a financial advisor who can prepare a tax simulation for you so that you fully understand the impact of withdrawing funds. Similarly, if you have been awarded discretionary investments as part of the settlement, bear in mind that there may be tax and CGT implications of withdrawing this capital, and it’s important to understand what these are before making a knee-jerk decision.

The importance of updating your will

Not updating your will after your divorce can have disastrous consequences and may result in your ex-spouse unintentionally inheriting from you. Section 2B of the Wills Act provides a three-month leeway for divorcing spouses to amend their wills in line with their changed circumstances. This means that if you die within three months of your divorce, your estate will be distributed as if your ex-spouse had died before you – in other words, your ex-spouse will not stand to benefit from your estate. However, after the three-month leeway period, if you have not updated your will, it will be assumed that you intended for your ex-spouse to benefit from your estate. As an important aside, when amending your will, be sure to include a clause that specifically revokes all previous wills and ensure that your new will is clearly dated to avoid confusion. If you have a separate Will for your foreign assets, be sure to update this as well.

Amending your beneficiary nominations

To ensure the correct distribution of your assets in the event of your death it is not enough to simply update your will. If you have life insurance policies and living annuities in place with beneficiaries nominated, remember that these policies will pay out directly to those beneficiaries in the event of your death. Be sure, therefore, to make any beneficiary nomination changes directly with the insurer or investment house.

Securing your maintenance

If your ex-spouse has a maintenance obligation in terms of the divorce order, consider putting life cover in place to protect this obligation. Keep in mind that a maintenance order in favour of your minor children can form a claim against your ex-spouses’ estate in the event of his passing. A correctly structured life policy on the life of your ex-spouse can ensure that there is sufficient liquidity in their estate to meet their post-humous financial obligations.

Recalibrating your retirement plan

It’s likely that a divorce will up-end your retirement plan forcing you to complete review and recalibrate. Being solely responsible for your future financial security can be overwhelming and will no doubt take discipline and careful planning to ensure that your retirement years are adequately funded for. Keep in mind that any pension fund interest that has been awarded to you as part of your divorce order was earmarked for your retirement so, if possible, preserve this money for its original purpose.

Budgeting for a life after divorce

Budgeting for one person as opposed to two does not mean that your budget is halved. Certain costs are fixed regardless of how many people benefit from them, such as rental, certain utilities, subscriptions, garden and domestic services, and the costs of caring for pets. At the same time, you will need to factor in how much you need to contribute towards your retirement funding so as to make any shortfalls. As a single parent without the help of another set of hands, you may also need to account for the costs of au pairs, childminders and babysitters especially if you work full-time. While emergency funding is important for everyone, as a newly single parent you may want to further fortify your emergency money, especially if your ex-spouse has a maintenance obligation to you. Over and above your normal emergency money, keep at least one month’s worth of maintenance in a separate account just in case your ex-spouse defaults.

Continuing your medical aid membership

If you need to move off your spouse’s medical aid and onto your own one, be sure to make a seamless transition with no interruption in membership as this could leave you unnecessarily exposed. Remember, any break in membership of 90 days or more can result in you having waiting periods and late joiner penalties imposed, so be thorough in your dealings with your medical aid scheme.

As is clear from the above, there are multiple financial decisions that need to be navigated at a highly emotive period in one’s life, and our advice is to partner with a trusted advisor who can help you navigate the economic effects of divorce.

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