Splitting retirement savings on divorce
Negotiating to claim a portion of a former spouse’s accrued funds is often neglected
NO COUPLE believes on their wedding day that their newly minted union will end in divorce. The stark reality, however, is that just under half of marriages in South Africa do not last 10 years. And many of us have little to no understanding of how our assets will be split in a divorce, or how this will impact our journey to a secure retirement.
During the turmoil of negotiating the splitting of assets, an area that is often neglected is the negotiation to claim a portion of your former spouse’s retirement savings.
In terms of the Divorce Act, your retirement benefit forms part of your assets and must be considered when dividing your marital assets. This is particularly important for a spouse who has put their career on hold to take care of the children and in doing so has not built up sufficient savings for their retirement.
However, if couples are living together as “husband and wife” and are not married under an Act of Parliament such as the Marriages, Recognition of Customary Marriages or Civil Union acts, there cannot be a pension interest transfer. Under these circumstances, there is no marriage capable of dissolution in terms of the Divorce Act, which enables the transfer of a pension interest benefit.
The Pension Funds Act, which regulates all private funds, was amended to allow for a pension interest transfer on the dissolution of an Islamic marriage by an order of court.
The legal terms of a marriage will determine the guidelines for financially exiting the union. In terms of the law, if you are married in community of property or out of community of property, with the accrual system you may be entitled to a portion of your former spouse’s pension interest. In a pension or provident fund, pension interest is the amount of money that a spouse would have received if they resigned on the date of the divorce.
This does not mean that the retirement fund member needs to split their pension interest in half to pay their former spouse. They have the choice to pay the amount that the former spouse would have received from the retirement fund, from the other assets in the estate.
Also note that the pension interest claim is not limited to 50 percent, as in terms of the law the parties can claim anything from 0.1 percent to 100 percent of the pension interest benefit of the former spouse.
The benefit allocated to the non-member spouse is now payable from the date of divorce. This was not always the case. Before September 13, 2007, the non-member spouse had to wait until a benefit was accrued to the member before being able to access the divorce benefit assigned to him or her. The non-member spouse would, therefore, be able to access the divorce benefit only upon the member’s exit from the fund due to resignation, retirement or death.
With the introduction of the “clean break” approach in 2007, which applies to pension, provident, retirement annuity and preservation funds, the non-member spouse may immediately claim the portion of the member’s pension interest and can elect to receive a cash benefit or transfer the benefit to another retirement fund.
If a person does decide to split their pension interest and claim payment from their retirement fund, there are certain legal requirements that have to be met before their retirement fund can pay part of their benefit to their former spouse.
When it comes to pension interest, poorly drafted divorce orders can drag out divorce proceedings significantly and, in worst-case scenarios, result in non-member spouses not receiving their intended entitlements.
It is important that clients are careful when drafting and reviewing their divorce orders. Clients are advised to check with their funds or its administrators, prior to the divorce, if the wording used will result in a valid claim for the former spouse.
There are four key requirements that must be included in a divorce order in terms of the Pension Funds Act to facilitate speedy payout:
1. A client must be a member of their particular retirement fund on the date of the divorce order.
2. The name of the fund must be in the divorce order, or the fund must be identifiable from the order.
3. The divorce order must specify the amount that the former spouse should receive.
4. The divorce order must specifically order the fund, and not, for instance, the member, to pay a part of the pension interest to the former spouse.