Financial Planning: How does divorce impact on retirement fund benefits?

 The clean break principle in respect of divorce was introduced into our law on 13 September 2007 and basically means that on divorce a non-member spouse is now entitled to claim his/her share in the member spouse's pension interest as soon as the parties are divorced.

Practically, the fund has 60 days from receipt of the valid divorce order to transfer the benefit into the non member spouse's name.

Who qualifies?

Sections 7(7) and 7 (8) of the Divorce Act govern the distribution of fund benefits on divorce, and should be read together with section 37D of the Pension Funds Act as well as various sections in the Income Tax Act. In terms of section 7(7) of the Divorce Act, everyone married in community of property or out of community of property with the accrual system may qualify for an award against the other spouse’s retirement fund in terms of the Divorce Act. But where there is an ANC excluding the Accrual or excluding profit and loss entered into after to 1984, you will not qualify for an award in this regard.

What is the non-member spouse entitled to?

Section 7(7) of the divorce act refers to “pension interest”. This concept is specifically defined in the Act and distinguishes between pension funds on the one hand, and retirement annuity funds on the other.

Pension funds (this includes Provident and Preservation Funds): the non-member spouse is entitled to share in the benefit that the member would have been entitled to had the member resigned from the fund on the date of divorce (i.e. the member’s withdrawal benefit). That means that if the member has, for example, a housing loan from the fund, this amount (plus tax) must first be deducted and the non-member may then share in the balance.

Retirement Annuity Funds: the non-member spouse may share in the total amount of the member’s contributions to the fund up to the date of the divorce, plus annual simple interest on those contributions up to that date.

It is important to note that both the share of fund, and the contributions paid are taken from the start of the member’s membership on the fund, and not from the start of the marriage.

It is also interesting to note that the non-member may be allocated up to 100% of the defined pension interest.

What options does the non-member spouse have?

· They can either preserve the benefit and transfer it into a fund in their own name – so if the member’s fund is a RA, they can transfer their share to a RA in their own name or if it is a pension or provident fund they can transfer it either to a preservation fund or a RA; alternatively

· They can cash the fund benefit in.

How does the tax work?

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Are there any formalities that must be adhered to?

Yes, the divorce order must make specific mention of the fund benefits and the fact that the non-member spouse is to share in them. Further, the divorce order should indentify the relevant fund or policies, as well as specify the percentage of the pension interest that the non-member spouse is to receive at date of divorce. If the divorce order does not deal with the fund benefit in accordance with what is required in the legislation, the parties will have to revert to the High Court to have the provision amended so that it becomes enforceable.

· All private sector funds.

· Public sector funds, such as the GEPF (Government Employee Pension Fund), have argued that the provisions do not apply to them. In a recent case, in judgement handed down on 1 July 2011, the Cape High Court held that the Government Employees Pension Law is unconstitutional insofar as it fails to give former spouses of GEPF members the same rights as those enjoyed by former spouses of members of private sector funds (which are governed by the Pension Funds Act). The High Court gave Parliament 12 months to correct the legislation governing the GEPF (essentially the fund rules) and ordered that if it does not do so, provisions equivalent or similar to those applicable to private sector funds will be “read into” the Government Employee Pension law, which means that former spouses of members of the GEPF will have the same rights as those on private sector funds. (Wiese v GEPF)

What financial planning opportunities present themselves in the context of divorce?

· The non-member spouse ideally should preserve their benefit and not cash it in. Generally speaking, couples do retirement planning together and especially where the wife has acted as the home maker and is not a bread winner or the primary bread winner, she relies on the husband to make provision for “their” retirement. If on divorce she does not preserve the benefits, then when it comes to retirement the odds are very high that she will not have sufficient, or possibly even any, retirement funding in place. What will happen to her then? Will she be dependent on her children, who will have dependents of their own to look after?

· The member spouse needs to review his retirement planning to establish if he is still on track to meet his goals. In all likelihood, he will need to increase his contributions to the fund in order to be able to retire as comfortably as he originally envisaged.

· It is the beginning of RA season, when tax payers should start looking at maximising their tax savings by contributing at least the maximum tax deductible amount to retirement funds, with RAs allowing the greatest flexibility here. If you have clients who have been divorced and who have had their benefits reduced, this is the ideal opportunity to remind them that they may need to save even more.

· Outside of the fund benefits, if there are maintenance obligations, these should be secured by way of life cover, and if at all possible this should actually be a specific provision in the divorce order.