THE IMPACT OF DIVORCE
ON RETIREMENT SAVINGS OF MEMBERS OF THE GEPF
Upon divorce, the spouse of a member of a retirement fund may immediately be entitled to a share of that member’s pension interest held in the retirement fund of that member. The extent of the spouse’s entitlement to that share, depends on the specific divorce order and the law at that point in time.
Upon the divorce settlement, the non-member former spouse can choose to either receive their share in cash, or have it transferred to an approved retirement fund. If the non-member former spouse decides to take their share in cash, he or she will be responsible for the tax on the pension withdrawal.
Previously, upon divorce, the member would have a debt against his/her account for the nonmember former spouse’s pension share, known as divorce debt. The divorce debt gathers interest until the member retires or resigns. The member pays off the debt monthly or as a lump sum, and any remaining outstanding debt is deducted from the member’s retirement savings upon retirement or resignation.
On 23 May 2019, the GEPF amended its rules. Instead of creating a divorce debt upon paying the divorce settlement, there will now be an adjustment to the member’s pensionable service in terms of years of service to cover the divorce settlement. This means that the lump sum paid out upon retirement will be reduced by the number of years of pensionable service to take into account the divorce settlement.
The new rules came into effect on 1 August 2019. Members have until 22 May 2020 to choose between the divorce debt model or the service reduction model. Affected members who do not make a choice, will automatically be moved into the new service reduction model.
In light of a changing legislative environment, with potentially complex outcomes, Old Mutual advises divorcees to consider their options carefully. “Divorce is rated as one of the most stressful experiences that an individual might have to go through in life. Fund members should evaluate the sufficiency of their retirement savings following payments to their former spouses,” says Karabo Ramookho, strategic retail manager at Old Mutual.
Ramookho advises that in addition to the lump sum reduction to retirement savings, a further tax deduction upon the withdrawal of retirement
savings will be payable, further reducing retirement savings. It means that members should save more to make up for the losses to savings.
“Divorced retirement fund members should ask their financial adviser for assistance in evaluating their retirement planning needs, as part of a holistic financial plan. Any projected capital shortfalls should be addressed and supplemented with further appropriate investment products. Non-member spouses should similarly take stock of their situation, with the assistance of a financial adviser. This is an opportunity to invest the newly acquired asset into a growth vehicle for future retirement,” says Ramookho.
Inadequate levels of savings because of not addressing the shortfall of retirement savings, could result in divorced members not being able to retire comfortably. The earlier one starts addressing the gap of retirement savings, the easier it will be to accumulate the capital required to sustain the necessary standard of living. A simple measure illustrates this point, called the replacement ratio, which is the ratio of your income level after retirement as a percentage of your current salary. A replacement ratio of 38% means that you will only be able to earn 38% of your current income at retirement after allowing for inflation. A typical replacement ratio for someone retiring at 65 after contributing to a retirement fund for 20 years is 30%. On the other hand, a replacement ratio of around 80% can be expected when retiring at 65 after contributing to a retirement fund for 40 years. This illustrates how true it is that the earlier one starts to save for retirement, the better the chances of building up your replacement ratio and retiring comfortably. If you started to save for retirement later, then the replacement ratio can also be increased by saving more and making additional contributions into an appropriate investment product.
“Old Mutual personal financial advisers will act as partner and coach to help structure an action plan to create a healthy financial portfolio. Consideration should be given to the importance of a budget, settling debt, saving for an emergency fund, life and disability cover which provide essential financial protection for your dependants and a will,” concludes Ramookho.
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