​Press Room

Retirement benefits in divorce settlements


Grant Magid
Nov 04, 2016

I recently assisted a friend who was going through a divorce. Financial planning is usually the last thing on one’s mind when dealing with all the emotions, money matters, kids and changing circumstances, but it is important to consider how retirement benefits are dealt with in these situations, so that you are able to plan and adequately make provision for your retirement.

The current position in terms of the Divorce Act: a pension fund is permitted to pay a portion or all of the “pension interest” to the member’s former spouse (referred to as the non-member spouse).

What does “pension interest” mean?

  1. In respect of a member of a pension, provident or preservation fund: the total benefit to which the member would have been entitled to in terms of the fund rules, if their fund membership has ended on the date of the divorce by virtue of resigning from the fund.
  2. In respect of a retirement annuity fund: the total amount of the member’s contribution to the fund up to the date of the divorce, together with a total amount of annual simple interest (at the official prescribed rate), provided that this does not exceed the fund return.

For example:

Let’s say a member’s retirement annuity fund totals R1 200 000 as at the date of divorce, and the member contributed R50 000 pa since becoming a member ten years ago. The amount that will be considered as pension interest is R50 000 x ten years, plus 15.5% pa simple interest = R926 250 as your pension interest amount. The court will award either the total pension interest amount or a portion of it to the non-member spouse.

So it’s important to calculate the value of the pension interest when negotiating the divorce settlement and not the value of the retirement fund. Also important to note is that a life annuity or a compulsory life annuity (generally regarded as compulsory money), are not retirement funds and not included in the definition of pension interest, and therefore cannot be awarded to a non-member spouse upon divorce.

How fund administrators deal with the division of retirement funds

If you are getting divorced, and intend claiming against your spouse’s retirement fund benefit, it is important that your claim meets specific conditions as set out in the Divorce Act or the Pension Funds Act. A fund will only make a divorce payment if the divorce order is binding on the fund and meets all of the criteria:

  1. The divorce order must specify the pension interest assigned to the non-member spouse. In other words, the percentage or amount of pension interest must specifically be stated in the decree.
  2. The fund must be identified by name or at least identifiable from the order. A simple reference to the member’s “retirement fund” will not suffice.
  3. The fund must be ordered to pay the non-member spouse. In other words, there must be an order to pay, and the order must be directed at the fund;
  4. The divorce order must be valid, i.e. issued by a High Court, regional court or divorce court.
  5. The member must still be a member of the fund on the date the divorce is granted.

If the divorce order does not meet all the criteria and is not binding on the fund, the administrator of the fund should inform the non-member spouse accordingly. In this instance, the member and the non-member spouse cannot come to an agreement between themselves. The court order must be amended.

What are the non-member spouse’s options upon being awarded an amount from a retirement fund?

  1. Take the full amount awarded as a cash lump sum (taxable);
  2. Take a portion as a cash lump sum and transfer the balance to an approved preservation, pension, provident or retirement annuity fund;
  3. Transfer the full benefit amount awarded to an approved preservation, pension, provident or retirement annuity fund.

Taxation

The non-member spouse who elects to receive a cash lump sum is liable for tax on the payment as per the withdrawal lump sum tax table. If no lump sum is taken and the pension interest is transferred to another retirement fund, then no tax is due. The proceeds will be taxed in the hands of the non-member spouse, upon withdrawing or retiring from the fund at a later stage.