Death or divorce… how best to split assets

There are common issues faced by clients, upon death or divorce, which opens the door to having proactive conversations on how best to split assets.

In advising clients on these critical financial decisions, FAnews hosted a live webinar, sponsored by Fairheads Benefit Services and Momentum Corporate, on beneficiary funds, trusts and divorce.

In part one of the article David Hurford, CEO at Fairheads Benefit Services, talked about beneficiary fund products, what they are, who can use them and the benefits they offer and Jeffrey Wiseman, CEO of Momentum Trust, discussed trusts and how beneficiary funds may also be an option when it comes to estate planning. 

Divorce and retirement funds

Another hot topic was that of divorce and retirement funds… considering the divorce rate has increased dramatically since lockdown started.

Shameer Chothia, Employee Benefits and Legal Consultant at Momentum Corporate said during the turmoil of negotiating the splitting of assets, maintenance and the custody of children enjoy priority, but an area which is often neglected is the negotiation to claim a portion of the former spouse’s retirement savings.

In 2019, there where 129 000 marriages and 23 000 divorces. According to an article on capetownetc, there has been a 20 percent increase in divorce applications since level 4 lockdown. So, how are assets and liabilities split during divorce and how will the split impact the client’s journey to a successful retirement?

Benefits and assets 

“In terms of the Divorce Act, retirement benefits generally form part of the assets, depending on the marriage contract and must be considered when dividing marital assets. However, when couples are living together as ‘husband and wife’ without getting married under a legal Act of Parliament, there cannot be a pension interest transfer as there is no marriage capable of dissolution in terms of the Divorce Act, which enables the transfer of a pension interest benefit,” said Chothia. 

“The legal terms of a marriage will determine the guidelines for financially exiting the union. In terms of the law, if people are married in community of property or out of community of property, with the accrual system, they may be entitled to a portion of their 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 the member had theoretically resigned on the date of the divorce. The pension interest claim is not limited to 50%, as in terms of the law, the parties can claim anything from 0.1% to 100% of the pension interest benefit of the former spouse. The benefit allocated to the non-member spouse is payable from the date of divorce,” added Chothia. 

“Pension interest in respect of retail retirement funds such as being a member of a retirement annuity fund or a preservation fund – for a retirement annuity it is the total amount of the member’s contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date, calculated at the same rate as the rate prescribed as per Prescribed Rate of Interest Act. For a preservation fund it is the benefit that the member would have received if their membership of the fund would have come to an end on the date of divorce” continued Chothia. 

“Section 37D(4)(c) of the Pension Funds Act clearly states that the non-member spouse is not a member or beneficiary in relation to the fund. The non-member spouse is only entitled to fund return (interest) on their benefit from the date of the deduction, which is the date on which an election is made or, if no election is made within the 120-day period, the date on which that 120-day period expires. The non-member spouse is not entitled to any other interest or growth. The Pension Funds Adjudicator’s has confirmed that the non-member spouse is not entitled to any investment returns or growth on their portion of the pension interest after the date of the divorce,” said Chothia.

“Before 13 September 2007, the non-member spouse had to wait until a benefit is accrued to the member before being able to access the divorce benefit. The non-member spouse would, therefore, only be able to access the divorce benefit upon the member’s exit from the fund. This position has now changed, and non-member spouses can immediately claim the benefit on date of divorce. With the introduction of the “clean-break” principle 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,” added Chothia.

There are five key requirements, according to Chothia, which must be included in a divorce order, in order to facilitate a speedy payout and resolution: the divorce order must have been granted under section 7(8) of the Divorce Act. Secondly, a client must still be a member of their retirement fund on the date of the divorce order. Thirdly, the name of the fund must be in the divorce order or the fund must be identifiable from the order. Fourthly, the divorce order must specify the amount of pension interest that the non-member spouse should get. And lastly, the divorce order must specifically order the fund, and not for instance the member, to pay a part of the pension interest to the non-member spouse. 

What can go wrong? “Divorce orders are often poorly drafted, often meaning that the requirements are not met: division of pension interest, identification of fund and fund ordered to pay,” said Chothia.

How can you assist clients? 

“As a financial adviser you can assist your clients by going through a divorce and beyond. Continue to work with them as a couple or only with one. Work with other professionals e.g., divorce lawyers and remain open and impartial in discussing financial planning matters. A holistic financial plan is vital in incorporating multiple financial strategies to allow clients to live their best lives while knowing that future uncertainties are taken care of,” concluded Chothia.

Writer’s thoughts:
Divorce and retirement funds are a hot topic… considering the divorce rate has increased since lockdown. We hope this has opened the door for you to having proactive conversations with your clients on how best to split assets. If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]

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