Divorce and splitting pensions – what you need to know about retirement savings in South Africa
Many South Africans often question what happens with the division of retirement benefits when divorcing.
Salome Young from Ninety One, South Africa’s largest private asset manager by assets under management, broke down what South Africans getting a divorce need to know about their pension.
The Divorce Act sets out the requirements for a valid divorce order, while the Pensions Funds Act provides for certain deductions that can be made to retirement funds, including divorce.
The type of marriage that one enters into will determine if the retirement fund will be taken into account during divorce.
“For example, if you were married out of community of property on or after 1 November 1984 and your antenuptial contract excludes community of property, community of profit and loss, and the accrual system, your retirement funds cannot be shared,” said Young.
“Recent case law actually states that a non-member spouse may be automatically entitled to retirement fund benefits (where married in community of property). The divorce order, however, still has to comply with requirements in legislation to be able to make a deduction.”
Those married out of the community of property with the accrual or in the community of property can, as part of the divorce settlement, decide whether to share the retirement funds.
For instance, one spouse may get the house while the other spouse has access to retirement funds.
The divorce order must also specifically refer to ‘pension interest’ for it to be binding.
It needs to be clear what percentage or amount of the pension interest is awarded to the non-member spouse.
“If the divorce order states that the non-member spouse is entitled to 40% of the member’s pension interest, then this requirement will be met,” said Young.
“If the divorce order states that the non-member spouse is entitled to 40% of the member’s provident interest or 40% of the member’s pension fund, then this requirement will not be met. The words ‘pension interest’ are vital to make the order binding.”
The retirement fund must also be named in the divorce order or at least identifiable. This could include a membership number.
In addition, the retirement fund must be specifically ordered to pay the amount or percentage of the pension interest to the non-member spouse. This requirement will be met if the divorce order states that:
- The fund must pay the non-member spouse; or
- Payment must be made in terms of section 37D of the Pension Funds Act or section 7(8) of the Divorce Act; or
- The fund has to make an endorsement in its records in accordance with section 7(8) of the Divorce Act;
It is also important to note that the meaning of pension interest differs depending on the type of retirement fund.
“Where the fund is a pension fund, pension interest will be the benefit the member would have been entitled to had they resigned on the date of divorce,” said Young.
“Where the fund is a retirement annuity fund, pension interest will be the value of contributions made to the fund as at the date of divorce, plus annual simple interest (at the official prescribed rate).”
“Pension interest in relation to a preservation fund is the benefit the member would have been entitled to have their fund membership terminated, or had they retired from the fund on the date of divorce.”
The spouse must also be an active member of the relevant fund. Otherwise, there is no pension interest.
If a portion of a pension interest in a retirement fund is allocated to a non-member spouse (i.e. the spouse is not a member of the fund), the non-member spouse may try to:
- Take the portion allocated to them as a lump sum;
- Transfer the portion allocated to them to a retirement fund in their own name.
If the non-member spouse decides to receive the pension interest as a lump sum, they will need to be taxed on it in accordance with a special ‘withdrawal tax table.’
A transfer to a retirement fund in the non-member’s name is done on a tax-neutral basis.
There are no tax consequences for the member of the fund when the non-member moves funds around.
Not the same for living annuities
Ninety One often receives queries for divorce orders where a portion of the living annuity capital or income has been awarded to one of the parties.
Several court issues have dealt with the issue, such as a recent Supreme Court Of Appeal case, which confirmed that the capital of a living annuity does not belong to the annuitant, as it belongs to the life company that issues the policy.
The annuitant only has a right to the annuity income, meaning that the living annuity capital cannot be shared or split on divorce.
That said, the court did state that the future right to annuity income can be taken into account when calculating the accrual claim.
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