As ugly as divorce is, if it happens it can affect the accrued savings in your retirement fund. In this article I would like to give you a simple overview of the practical aspects of divorce in relation to your retirement savings. I will try keep things as simple as possible so that you can understand the implication of divorce on retirement savings, without an expert understanding of retirement funds.
For purposes of this article we will assume that you are a member of a pension or provident fund, we will refer to this as your ‘retirement fund’, and you want to know what happens to the retirement savings accumulated in this retirement fund, if you and your spouse legally end your marriage.
As part of your divorce settlement or agreement, your spouse may become entitled to a portion of your retirement savings. There is the perception that the non-member spouse is entitled to, or qualifies for, 50% of your retirement savings at the date of divorce, but this is not necessarily the case.
The Divorce Act allows a non-member spouse to claim a portion of their spouse’s retirement savings as part of the divorce settlement. The retirement fund can be instructed to either immediately pay, or to reserve the proportion (or amount) of the retirement savings payable to the non-member spouse for later payment to the non-member spouse.
The split of retirement savings, between the member and non-member spouse must be clearly stated in an official Decree of Divorce (referred to as a divorce order), issued by a court (this could be the High Court, a Regional Court or the Divorce Court).
The retirement savings could be split in any proportion per the divorce order; which means the member and non-member spouse can agree on any portion of the benefit payable as at the date of divorce, being paid to the non-member spouse, and that could range from nothing to one-hundred percent.
The divorce order may also instruct a fixed amount to be paid to the non-member spouse.
The payment to the non-member spouse will be made by the fund administrators, strictly in accordance with the divorce order. The administrators will check for certain things before payment is made so it is important that the divorce order is worded correctly (there are many examples of delays being experienced simply because the divorce orders are not worded correctly). When the divorce order is set up, the relevant, professional, legal advisor must ensure that the name of the retirement fund (or funds should there be more than one fund involved) is clearly stated, that the proportion to be paid, per fund, to the non-member spouse is clearly stated, or the decree must order the retirement fund to adjust its records to reflect the claim of the non-member spouse to be settled when the member exits the retirement fund.
Whatever the agreement is between the spouse and non-member spouse, it should be accurately captured in the divorce order or the fund administrators won’t be able to make payment efficiently.
It is important to remember that the member against whose retirement benefit is being claimed must still be a member of the retirement fund on the date that the divorce order is granted.
Who pays the tax?
In terms of the Income Tax Act, the non-member spouse is required to pay any tax due on their portion, taken as a cash lump sum, if the divorce order was granted after 13 September 2007 and the deduction was made from the member’s pension interest after 1 March 2009.
Any transfer to another approved retirement fund will not attract tax at the time of transfer.
What about transfers and emigration?
There are occasions when you may transfer from one Retirement Fund to another.
If a retirement fund transfers the benefit of a member to another retirement fund before a valid divorce order is served upon it in respect of the member, the retirement fund to which the transfer was made will be required to effect to the provisions of the divorce order.
A member who has emigrated and subsequently divorces in that country must apply to a South African court to have the divorce order recognised and enforced in South Africa.
I hope that this information provides clarity in terms of what can happen to your retirement savings in the case of divorce.
Remember that we are not providing any legal or financial advice and should you require any expert or professional advice you must contact an authorised Financial Advisor.