This article will deal mainly with provident funds and will not include separate rules applicable to other retirement funds.

Apart from being involved in a major life-changing event involving sorting out the settlement agreement and worrying about the impact on the children, the parties to a divorce should be aware of how a divorce will affect their retirement planning. Retirement provision is a major part of our financial planning process and many of us save during our working years to a fund. We should therefore take any event that will have an impact on our life savings into consideration, and one of these includes divorce.

Firstly, let’s consider the different marital regimes. Your marital regime will, as a starting point, determine the distribution of the assets during the divorce process.

In Community of Property:

The pension interests of the spouses form part of the joint estate. Therefore, the non-member spouse will automatically be entitled to 50% of the member spouse’s pension interest at the date of divorce.

Out of Community of Property with Accrual:

The respective pension interests form part of the separate estates of the spouses and will be considered for the accrual calculation.

Out of Community of Property without Accrual:

The spouses have separate estates. However, the court can order a redistribution of the assets. For marriages before 1/11/1984 the pension interest forms part of the assets of the parties consent to a redistribution of the assets. For marriages after 1/11/1984, sharing of assets will only take place in respect of mutual consent between the parties.

What is defined as your pension interest?

The value to be considered in divorce proceedings with regard to provident funds is calculated by your fund and is defined as the benefit to which a member would have been entitled in terms of the rules of the fund if his/her membership had terminated due to resignation at the date of divorce.

In the case of a retirement annuity “pension interest” refers to the sum of the member’s contributions to the retirement annuity fund (up to the date of divorce plus simple interest at a prescribed rate). Interest may not exceed the fund return.

In the past, the non-member spouse had to wait until the member spouse became entitled to benefits from the fund before he/she could receive the allocated benefit payment. The “clean break” principle was introduced in 2007 through legislation which makes it possible for the non-member spouse to receive the payment immediately after divorce.

What about tax?

It all depends on dates due to legislative changes. For current divorces, the non-member is taxed on the cash payment according to a fixed scale. It should be kept in mind that if the non-member later retires or withdraws from another fund and receives a lump sum, the lump sum he/she received at divorce will be taken into account to calculate further tax on lump sums.

The non-member spouse has the option to receive the amount in cash, where tax is payable as above, or to transfer and preserve the benefit in another approved fund where tax will become payable at accrual of those benefits. It is also important that the spouse seeks advice from an accredited financial advisor to assist in choosing the correct option for his/her special circumstances.

Divorce order:

It is also vital that the divorce order contains the correct information of the fund, specific percentage or amount to be awarded, and correct reference to “pension interest” in order for the fund to enforce the divorce order. The provident or pension fund may reject the divorce order if it is incorrectly drafted and a new application to the court will have to be made to rectify the order.

Always seek professional advice!

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top