Divorce order and maintenance deductions from your retirement savings

Hettie Joubert, Head of Retirement fund governance MMI Investments and Savings, Retirement Solutions.

You can save towards retirement in various ways. One option is to do so in a retirement fund. This can be done through the employer’s pension or provident fund, as an individual in a retirement annuity fund, or by preserving pension or provident fund benefits in a preservation fund when you resign from your employer and has to leave the fund in which they participated. The main purpose of this savings method should be to put away money for your retirement. It then follows that you should not take any of it out of the fund before your actual retirement date.

What often happens though is that members of retirement funds often give some of their retirement savings away when they get divorced. This is allowed for under the Divorce Act and the Pension Funds Act. The Divorce Act says that if you are married in community of property, your “pension interest” in a retirement fund will be considered to be part of your assets to determine what the parties to a divorce action may be entitled to. “Pension interest” is determined differently for the different types of funds. In a pension and provident fund, it’s the benefits you would have been entitled to if you resigned on the date of divorce. In a retirement annuity fund, it’s the member’s contributions to the fund up to the date of the divorce, plus annual simple interest on that amount up to the date of divorce. The current rate for this purpose is 9% per annum. In a preservation fund, pension interest is the amount that you would have been entitled to if you terminated your membership of the fund on the date of divorce. The Pension Fund Act allows a fund to deduct the amount that must be paid to your ex-spouse (referred to in the Act as a non-member spouse) from your benefit and pay it to your ex-spouse, or transfer it to a fund of their choice. The fund will only do this if the divorce order is binding on the fund. For it to be binding, the divorce order must meet three basic requirements:

1. It must be clear what percentage of the pension interest or what amount is should be paid to the non-member spouse.
2. The fund must be named in or be identifiable from the order.
3. It must be specifically ordered that the fund should pay the specified amount to the non-member spouse.

This deduction can be made even if you are still in the fund. Your ex-spouse can therefore get a part of your benefit paid to them even though you are not entitled to any benefit yet. The ex-spouse will pay tax on that part of the benefit paid to them.

By the time you get to retirement, you will have less to retire on, because you gave away a portion of your benefit when you got divorced, and also lost out on the growth you could have gotten on it if you left it in the fund. Members of retirement funds often think that it is easier to give away something that they don’t have yet, but don’t realise the impact of that on their ability to retire more comfortably. Instead of just following the easier way out, you could rather give up another asset that will not have such a disastrous effect on your retirement savings.

The Pension Funds Act also allows for the deduction of arrear maintenance. This will apply when, as part of the divorce, you have to pay maintenance, but do not do so. Your ex-spouse can then go to the Maintenance Court and get an order to allow the fund to make a deduction against your retirement fund benefit for the amount that you owe. You will have to pay the tax every tie that the fund makes such a deduction. You will therefore not only get your benefit reduced by the maintenance amount, but also the tax on it. Once again, these deductions will reduce the benefit that will eventually be paid to you when you retire. It would be better for you to rather pay the maintenance as stipulated in your divorce order than having it done by the fund, from your retirement benefit.

Before you consider a deduction from your retirement fund benefits, please consult with a financial adviser, who can assist you with alternative arrangements, keeping your retirement savings in tact.