Divorce and Pension Funds 

How does a divorce affect pension or retirement funds? And what can one expect of the legal process?

Firstly, it must be said that it is of utmost importance to have an attorney who specializes in divorce law to draft ones divorce settlement. Van Deventer and Van Deventer incorporated are just the specialists to ask. 

It often occurs that badly drafted clauses cause the courts to reject claims made. Failing to produce a correctly drafted settlement to the court leads to one needing substantive application, which entails much time, energy, and great cost in order to rectify the situation.
 

Pension Funds Defined

A ‘pension fund’ is a well-used term referring to all types of retirement funds which fall within the scope of the Pension Funds Act. It is also used as a descriptor of a specific type of pension fund, in which at least two thirds of the retirement benefit is taken as an annuity. 

The other types of pension funds are: 

• Provident funds – where the members have the right to take the whole retirement benefit in cash, 
• Retirement annuity funds – retirement plans outside of the occupational environment and 
• Preservation Funds – where benefits from a pension fund can be transferred.

Again, incorrect drafting of a settlement agreement leads to many inconveniences to say the least. All too often settlement agreements are rejected on the basis of clauses dealing with the pension pay-out being drafted incorrectly. 

As amendment or creating variation in the settlement comes at great cost, one should never rush the dividing of pension or retirement funds in a divorce settlement.

The Divorce Act and the Pension Funds act 24 of 1956 contain all the relevant provisions which control the allocation of unaccrued pension benefits to a non-member spouse (the spouse who is not a member of the fund) upon divorce. 

A claim under the Divorce Act may only be brought to light where the spouse or a partner in the civil union is still a member of the fund. Once the spouse chooses to exit the fund (due to retirement or as result of an early withdrawal), the benefit accrues to him/her, and there will no longer be any ‘pension interest’ or unaccrued benefit.

Pension Fund - Asset in the separate or joint estate 

If the benefit accrues before the date of the divorce, it has to be treated as any other asset in the separate or joint estate. 

If a couple is married or in a civil union in community of property, each partner will have a claim against the others pension fund. The claim will be for up to half the pension interest on the date of divorce. 

How the different marital systems affect retirement fund claims:

Marriages in community of property 

The pension interest of the spouses will become part of the parties’ joint estate and the non-member spouse will be entitled to claim 50% of the pension interest of the member as of the date of the divorce. 

Marriages out of community of property with accrual

Here the spouse’s pension fund value is taken into account to determine the value of his/her estate for the purpose of accrual calculation (only). 

Marriages out of community of property without accrual before November first 1984

The spouses retain their own separate estates and there is no sharing of assets in the divorce, unless a court specifically orders a redistribution of assets in terms of Section 7(3) of the divorce act. 

A pension interest forms part of the spouse’s estate and will then form part of the assets if redistribution is ordered by the court. Parties may also agree to share the pension interest in a settlement agreement (which when ordered by the court, has the power to override the previously agreed upon conditions of the divorce settlement). 

Marriages out of community of property without accrual after November first 1984

In this system, the spouses retain their own separate estates, with no sharing of assets at divorce. If the spouses wish to share the pension interest, they will have to provide evidence of mutual consent regarding the matter. The couple may choose to share the pension interest in a settlement agreement. 

The clean break principle

The Pension Funds Amendment Act of 2007 introduced this principle for the treatment of retirement fund benefits upon the granting of a divorce decree.  The Act allows for retirement fund benefits to be accessed once a divorce decree has been granted. 

The Act allows retirement funds to deduct an amount or a percentage of the benefit upon divorce and pay it to the non-member spouse’s retirement fund of his/her choice. The amount of access is either agreed upon or a court ordered share of the member spouse’s retirement savings on divorce.

The assigned amount (which may be any from 0% to 100% of the pension interest) may be paid from the member’s pension fund to a non-member in terms of a divorce order granted under the Divorce Act, irrespective of the date of the divorce, but may not be 100% of the value of the member’s withdrawal benefit at the date of the divorce. 

For the fund to make the deduction and payment to the non-member spouse, the fund must be ordered to endorse its records (which is to make a note on the system) to such an effect and/ or to make payment to the non-member spouse. 

The non-member has the option to receive a cash lump sum or to have the money transferred to an approved pension fund. 

A fund is not allowed to deduct and pay over any interest on the amount that is assigned to the non-member spouse (except where it is stipulated in the Act to not pay the non-member due to certain time-frames).

Government Employees Pension Fund and Divorce

The Government Employees Pension Fund (GEPF) was amended to introduce the clean-break principle from the effect from the first of April 2012.  Previously, a portion of the member’s pension benefit payable to the former spouse as part of the divorce settlement was only paid when the member spouse left the fund. 

With the new amendments, former spouses are now able to receive their share of the pension interest soon after the divorce is completed, either as cash or a transfer to another pension fund of their choice. 

The new regulations state that on the date of the payment of a divorce benefit, the GEPF will create a debt against the member that is equal to the amount payable to the non-member spouse. The debt amount will build up with interest, until the member exits the fund (and will be reduced to the extent that the debt is partially repaid over the member’s remaining period of service in the fund). 

At the date of the member spouses exit from the fund, the total value of the benefit will be determined, and will be decreased by the outstanding amount of debt owed.  

Pension Interest 

Pension interest is a term defined in the Divorce Act for every type of fund except a preservation fund. According to the Pension Funds Act, pension interest is: 

• Pension and provident fund 

Where the benefits to which a member would have been entitled to in terms of the rules of the fund, if the membership had terminated, due to resignation, at the date of the divorce.  

• Retirement annuity 

The sum of the member’s contributions to the fund up to the date of the divorce plus simple annual interest at the prescribed rate. 

• Preservation fund 

The benefit which a fund member would receive if the membership were to notionally terminate on the date of divorce. 

It is possible to assign a value to the non-member spouse instead of a percentage of the pension interest, provided that the amount does not exceed the value of the pension interest (more than 100%). 

It is not fit to award interest on the pension interest allocated to the non-member spouse as this is statutorily regulated in the Act, which already provides for growth on the allocation portion.  

Interest only begins running a few months after the date of the divorce. If the allocated pension interest is not paid within the statutorily prescribed time limits. 

It is imperative to know exactly what is meant by the term ‘pension interest’ in a divorce settlement that involves handing over retirement savings, whether the savings are: 

• In a pension fund / a Provident fund sponsored by an employer/ trade union/ industry association; or 
• A retirement annuity fund or a preservation fund sponsored or authorised by a financial service company. 

It is for this reason that it's important that pension interest applies only to the previously mentioned funds and not to an annuity (a pension) bought at retirement, or a former fund member’s retirement savings which are held in the fund until the former member retires. 

In terms of the Pension Funds Act, a pension fund is obligated to give a non-member spouse the right to decide how pension interest should be paid out (in a cash lump sum or reinvested into a retirement fund of their choice). 

On the presentation of the divorce order, the fund usually has 45 days to request the non-member spouse to decide how they would like the pension interest to be paid to them. After which, the non-member has 120 days in which to reply with their decision. 

When claiming pension interest, it is important to consider the following questions: 

• Is the fund a preservation fund or not? 
• Should the non-member take the award in cash or transfer it to another fund?
• If the award is taken in cash, how will it be invested? 

Pension interest may be excluded in an ANC (antenuptial contract). If marrying out of community of property with accrual, the spouse who is a member needs to expressly exclude the value of the retirement annuity / pension fund as at the date of the marriage when one draws up the ANC.  

How is pension interest calculated? 

In retirement annuity (RA) fund, pension interest is defined in the Divorce Act as “The total amount of that party’s contribution to the fund up to the date of the divorce, together with the total amount of annual simple interest in those contributions up to that date.” 

The Pension Fund Act further states that the “total amount of annual simple interest payable in terms of the definition may not exceed the fund return on the pension interest assigned to a non-member spouse in terms of a decree granted in terms of the divorce act.” 

Therefore, the non-member spouse is entitled to claim the lower of either annual simple interest (currently at an annual rate of 15.5 per cent) or fund return on the pension interest allocated to the non-member in terms of the divorce order. 

The non-member spouse of a pension fund is only entitled to the accrual of fund return on their share of the pension interest from when they have submitted the court order to the funds and has made an election as to how their share of the pension interest should be paid directly to him/her or transferred into another fund until the set date of payment. 

In preservation fund, if there has been a once-off withdrawal already made prior to the divorce, the value of the remaining investment (usually represented by death or disability benefit) can be used to determine a termination value. 

Divorce and Pension Funds & Divorce Settlement Agreements

Citing the fund in the divorce settlement

We cannot stress enough the importance of stating the correct name of the retirement fund at all times. The most common culprit for either the rejection of or the flat out refusal to pay out by a fund is uncertainty concerning which fund is intended to pay. 

It is not sufficient to only refer to the administrator as these financial organisations usually manage numerous funds, so it is absolutely imperative to be specific when naming the fund that one wishes to claim from. 

Divorce orders

A list of items a divorce order must contain: 

(i)    A specific reference to “pension interest” must be made as defined in the Divorce Act.

If the fund is a preservation fund, the order must read “pension interest” as defined in section 37D(6) of Pension Funds Act.

The following will generally not be binding: “pension fund”, “pension benefits”, “joint estate”, “member’s interest in the fund” or the “proceeds of the policy”.

(ii) The name of the Fund.

Where the fund is not named, it must at least be possible to determine from the wording of the order which fund the parties had in mind.

For example, the “fund of the member-spouse’s employer” would be ascertainable but the “Liberty pension fund” is not ascertainable since financial institutions operate several funds.

(iii) A specified percentage or amount of the pension interest must be
provided.

It must be clear from the order how much of the member’s pension interest has been assigned to the non-member spouse.

The following will generally not be binding:

• An order which stipulates that the pension interest must be divided equally will not be considered binding as it does not indicate that 50% of the pension interest has been awarded to the non-member spouse.
• “Any debts incurred by the non-member spouse after the date of divorce must be deducted from the pension interest” – compliance with a further condition of one of the parties cannot be enforced against the pension interest of a member.

Taxation of pension interest allocations

If the non –member chooses to transfer their part of the pension interest benefit to another retirement fund, then the transfer will be tax-free. However, if the non-member chooses to take the benefit in cash, then they will have to pay the tax on the pension interest.  

It is very important to clearly address the issue of tax in the settlement agreement. Presently, the pension interest deduction is taxable in the hands of the non-member spouse.  Though, the tax dispensation can vary for divorces which have already been obtained. This depends on the date of the divorce and the date of elections (in terms of section 37D(4)(b). 

This can be a difficult area to navigate alone, especially since the laws surrounding this topic have changed several times in the past few years. Another factor that can make this task an arduous one is when the pension interest happens to be a considerable amount, therefore it is highly advisable to obtain the professional advice that Van Deventer and Van Deventer incorporated is trained to provide.

Van Deventer & Van Deventer Incorporated -  Divorce Attorney Johannesburg

Contact Van Deventer & Van Deventer Incorporated for expert legal advice regarding divorce and pension funds, and the drafting of antenuptial contracts.
 

Bond & Transfer Calculator