The hidden consequences of divorce

Apart from the obvious emotional side-effects that go hand in hand with divorce, there are serious economic impacts to consider. An inevitable consequence of divorce is the separation of assets which often leaves both parties less prepared for their retirement years. Most divorce orders will include provisions that deal with the member spouse’s retirement fund contributions. And recent changes to the Pension Funds Act aside, it’s always a good idea to assess one’s post-divorce financial situation.

Then and now – splitting the retirement kitty

Before 13 September 2007 any divorce order that granted a share of a retirement fund to a non-member spouse could only be enacted when the member spouse exited the fund. The amount of the award would be calculated at the date of divorce – leaving the non-member spouse severely compromised in that further growth on this investment would not accrue to them. The obvious impact for the non-member spouse was that inflation would erode his/her share of the retirement funding.

This prompted legislators to make changes to the Pension Funds Act. The situation after 13 September 2007 gives the non-member spouse immediate access to his/her share of the retirement fund. They now have an opportunity to invest and manage these funds to achieve the best possible longer term outcome. Advice Manager at Old Mutual Personal Financial Advice & Private Wealth Management Mark Cronje says “gaining access to funds pre-retirement is not an opportunity to spend.” It is imperative that the non-member spouse doesn’t use the windfall from the retirement fund to subsidise the lifestyle changes that go with divorce.

The Pension Funds Amendment Bill was not without its legal complications. This is due to the retrospective application of its provisions not being totally clear. The Pension Funds Adjudicator believes the legislation should be applied to divorce orders prior to the cut-off date and has already ruled to that effect. But for now Old Mutual is awaiting further clarification which should come in the form of the proposed draft bill for general Financial Services Legislation. “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,” said Old Mutual.

Rightsizing your retirement contributions

Old Mutual urges both member and non-member spouses to take stock of their retirement savings in the event of a divorce. According to Cronje “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...” The most important outcome of this exercise is to identify any capital shortfalls and supplement these with appropriate investment products.

“Non-member spouses should similarly take stock of their personal situation with the assistance of a financial adviser,” says Cronje. It is essential that any capital gained in this situation is not squandered; but rather invested in an appropriate vehicle.

One should never underestimate the importance of early retirement planning. Old Mutual demonstrates this concept using a simple measure called the retirement ratio. They point out that a typical saver who contributes to a retirement fund for 20 years (and retires at 65) will achieve a replacement ratio of 30%. This saver will be able to draw 30% of his final salary in the year after retirement. Someone contributing to a retirement fund for 40 years will probably achieve a replacement ratio of nearer 80%. The best ways to boost this ratio are to start saving for retirement early and to make use of appropriate investment products.

Finding the right financial planner

“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.

Editor’s thoughts:
Some time ago the big debate was whether the Pension Funds Amendment Bill applied retrospectively or not. And in the ensuing media frenzy we lost focus of one very important fact. A divorce settlement can have a huge impact on retirement funding. In your experience what are the typical financial challenges faced by divorcees? Add your comments below, or send them to gareth@fanews.co.za