What happens to your retirement funds on divorce?

Divorces can be complicated, especially when it comes to the division of assets where a retirement fund or multiple retirement funds are involved. As it currently stands, a spouse can bring a claim under the Divorce Act for a share of her spouse’s retirement fund upon the dissolution of the marriage. However, this process is a complicated one strictly governed by the Divorce Act, Pension Funds Act and Income Tax Act, and is best navigated together with an attorney who specialises in divorce. The non-member spouse’s claim to the member spouse’s pension interest is not an automatic one and will depend on a number of factors including the matrimonial property regime under which the couple is married. It is important to bear in mind that the right to claim a share of the member spouse’s pension interest only applies to couples who are married or in civil union. If a couple is living together as ‘husband and wife’ but are not married under a legal Act of Parliament, there is effectively no marriage capable of dissolution and therefore no transfer of pension interest benefit.

Understanding the pension interest

When negotiating a divorce settlement, it is important to understand how the pension interest is calculated for the purposes of such a claim. In respect of pension, provident and preservation funds, the pension interest is the total benefit to which the member would have been entitled to in terms of the fund rules if their membership had terminated due to resignation at the date of divorce. Where the member spouse is invested in a retirement annuity, the pension interest refers to the total amount of the member’s contribution to the fund up to the date of divorce plus simple interest at the prescribed rate. Bear in mind that the generic term ‘pension fund’ refers to all retirement funds that fall within the ambit of the Pension Funds Act and, as such, a claim for a share in the pension interest cannot be brought in respect of living and life annuities. This can result in prejudice for a spouse where a divorce takes place after the member-spouse has retired.

The impact of matrimonial property regimes

The marital regime under which a couple is married will impact on such a claim in terms of the Divorce Act. Where a couple is married in community of property, the pension interests of each spouse will form part of the joint estate, and each spouse will be entitled to claim 50% of the pension interest at the date of divorce. In circumstances where a couple is married out of community of property with the accrual, each spouse’s retirement fund value will be taken into consideration when determining the value of their respective estates for accrual purposes. Keep in mind that a spouse can choose to expressly exclude the value in her retirement annuity or pension fund as at the date of marriage.

Matters can, however, become complicated for couples married out of community of property before 1984. Under this marital regime, each spouse retains their own separate estate and there is no sharing of assets at divorce. However, the court can order a redistribution of assets in terms of Section 7(3) of the Divorce Act, and the member spouse’s pension fund interests could form part of the redistribution order. Alternatively, a couple may agree to share the pension interests as part of their divorce settlement agreement. Where a couple is married out of community of property after 1984, they are deemed to have expressly excluded the accrual and there can be no redistribution of assets, although the couple retains the right to share the pension interest in their settlement agreement. This though becomes a personal obligation between the two parties, and it cannot be enforced against the retirement fund.

Options for the non-member spouse

Where a court has awarded the non-member spouse an amount from a retirement fund in terms of a valid divorce order, the retirement fund is obliged to give the non-member spouse the right to decide how the benefit will be paid out. The non-member spouse can choose to withdraw the full amount, although this will be subject to retirement fund withdrawal tax. She can choose to take a portion as a cash lump sum and transfer the balance to an approved retirement fund although, once again, the cash portion will be taxed accordingly. Alternatively, she can choose to have the full benefit transferred to an approved retirement fund, in which case no tax will be paid on transfer, although the proceeds will be taxed in her hands upon withdrawing or retiring from the fund at a later stage. Where the member spouse has a policy-based retirement annuity, bear in mind that the life insurer may impose a penalty for early cancellation of the policy as the withdrawal effectively breaks the terms of the contract, and this penalty should be factored in when determining the pay-out. Once the divorce order has been granted, the non-member spouse is normally given 120 days in which to make a decision regarding how she wants the pension fund interest paid, and it is always advisable that she seeks independent financial advice before making a final decision.

Requirements for a valid divorce order

To give effect to the claim, it is of the utmost importance that the retirement fund clause in the settlement agreement is correctly drafted and meets all legal requirements. An incorrectly drafted clause in the divorce order can result in the fund rejecting the settlement agreement and refusing to pay out the pension interest – which in turn would require the non-member spouse to bring a costly court application to rectify the wording in the divorce order. Where a divorce grants a non-member spouse a share in the pension interest, the divorce order will effectively instruct the retirement fund to pay over the agreed amount depending on how the non-member spouse has chosen to take her portion. Specifically, the divorce order must indicate the percentage or the amount of pension interest to be paid over to the non-member spouse, and any vagueness can result in the order being rejected by the fund. Further, the name of the retirement fund – not the administrator – must be included in the divorce order to avoid any confusion as to which fund is being referred to. Importantly, the member spouse must still be a member of the fund at the date of divorce. If he retires from the fund prior to the date of divorce, the proceeds then fall into his estate and will form part of the assets for division upon divorce.

Life annuities after divorce

Where a member spouse retires from the fund and purchases a life or living annuity, the pension interest is zero and the non-member has no claim. This means that if the member spouse retires from the fund just before the divorce order is issued, the right cannot be enforced against any annuity that the member spouse purchased with the funds. As such, common law principles and the division of matrimonial assets will then apply to any pension interests that have already accrued to a member at the time of divorce. The issue of whether or not living annuities form part of a spouse’s estate for the purposes of calculating the accrual has recently been put before the Supreme Court of Appeal in the matter of CM vs EM Case No: 1086/2018. In deciding whether the living annuities held by the husband formed part of his estate for purposes of calculating accrual, the court made a distinction between (a) the capital invested in the living annuities and (b) the right to receive a regular annuity payment from the insurer based on the capital value of the underlying investment. In its ruling, the court confirmed the current position that the capital portion of the annuity reflects on the insurer’s balance sheet and therefore belongs to the insurer. As such, the annuitant only has a contractual right to receive regular payment from the insurer and the capital value cannot be taken into account when determining the accrual. With regard to the annuitant’s right to receive regular payments from the insurer, the court ruled that the right to these payments was an asset in the annuitant’s estate and can therefore be taken into account when determining the accrual. How the value of this right is to be calculated has been sent back to the trial court for determination.

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