Old Mutual urges divorcees to review their provision for retirement
Upon divorce, the spouse of a member of a retirement fund may be entitled to share in the retirement savings of that member immediately. Whether the spouse is entitled to a share and the extent of the share depends on the provisions of the specific divorce agreement and the law.
Previously, when a divorce agreement awarded a share of the retirement fund to the non-member spouse, the share had to remain in the fund until the member exited the fund with no provision for investment growth. This was potentially highly inequitable to the non-member spouse as his/her share was subject to erosion by inflation, unless compensatory provisions were made in other aspects of the divorce agreement. The law has now changed and the non-member spouse has access to his/her share immediately for divorces occurring after 13 September 2007. Non-members may now invest his/her share. This has a significant advantage as it provides the opportunity to offset the effects of inflation.
The retrospective application to divorces prior to 13 September 2007 is under clarification and a new draft bill of the general Financial Services Legislation has been submitted for comment. While the principle of providing the non-member spouse with immediate access to their share is sound, in some divorce orders compensatory provisions may have been included, and it is important for the law to provide for this to avoid an unintended unfair consequence for either spouse. Old Mutual is therefore engaging with the regulator to ensure that both parties receive equitable treatment and that neither the member nor the non-member is treated unfairly.
In light of a changing legislative environment, with potentially complex outcomes, Old Mutual advises divorcees to consider their options carefully.
“Gaining access to funds pre-retirement is not an opportunity to spend,” says Mark Cronje, Advice Manager at Old Mutual Personal Financial Advice & Private Wealth Management.
Divorce is rated as one of the most stressful experiences that an individual might have to go through in his/her life. The fact that it brings with it a lifestyle change, should not be a reason to be tempted to use the lump sum amount to substitute the change in lifestyle. Having access to the extra capital should be identified as an opportunity to save for retirement and to plan for the future to ensure financial wellbeing.
Cronje advises fund members to evaluate the sufficiency of their retirement savings following payments to their former spouses. In addition, current tax legislation holds the member spouse liable for the tax arising on these payments and it is important to take this into account, especially if the divorce agreement does not contain an appropriate offsetting provision for such tax. “Divorced retirement fund members should ask their personal financial adviser for assistance in evaluating their retirement planning needs in light of these developments and in the context 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 personal 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”.
Inadequate levels of savings because the member fails to address the shortfall of retirement savings, or the non-member spouse fails to reinvest the capital in a suitable savings vehicle, could result in neither of them being able to retire comfortably. The financial adviser has a crucial role to play in bridging the knowledge gap between many consumers and the financial issues affecting them. The earlier o¬ne starts saving for retirement, the easier it will be to accumulate the capital required to sustain the required standard of living.
This point is illustrated quite nicely by a simple measure, called the replacement ratio, which is the ratio of one’s sustainable income level after retirement as a percentage of one’s current salary i.e. a replacement ratio of 38% means that one will only be able to sustain 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 one’s replacement ratio and of retiring comfortably. The replacement ratio can also be increased significantly by making additional contributions into an appropriate investment vehicle.
“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, changes to an existing will or drafting a new will and identifying and addressing other needs such as life and disability cover which provide essential financial protection for oneself and one’s dependants” concludes Cronje.
