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​​​​​​What Will Happen To My Retirement Annuity If I Get Divorced?

5 September 2018

In a recent social media post, radio and TV personality Masechaba Ndlovu announced her separation from her husband Vusi Ndlovu, shocking the nation with the saddening news.

The star took to Instagram to post a heartfelt message detailing her decision and calling Vusi the “man of her dreams”, and her “ride or die”. Truth is, nobody gets married with the intention to divorce their spouse. But the harsh reality is that 40% of marriages end in divorce before the 10-year anniversary. The latest figures from StatsSA reveal that 25 326 divorces were granted in South Africa in 2016.

One of the thorniest aspects of divorce is its financial implications. David Thomson, Senior Legal Adviser at Sanlam Trust, says divorce is an extremely traumatic event on its own and financial considerations play a huge part. People should, therefore, make sure that they carefully consider the bigger picture when it comes to evaluating their financial situation and making decisions. If you get divorced and are legally entitled to a portion of your spouse’s retirement money, take care before you think of this money as a ‘windfall’ to spend. Instead, remember that it was initially intended to provide a comfortable retirement, he warns. It is so important to know that regardless of whether or not you have your own retirement savings, upon divorce you are entitled to claim against your ex spouse’s retirement funds. Likewise, your ex also has a claim against your portfolio. There is one exception: spouses married on or after 1 November 1984 out of community of property and without the accrual system will not be able to claim from each other’s funds. Therefore, educating oneself on this issue is imperative.

During the divorce process, make sure that you take a holistic approach to ensure you stay on track with your retirement savings goals. “Don’t try to guess what your retirement needs are going to be – get a professional financial adviser to calculate this for you,” says Thomson. When balancing your immediate needs with retirement savings, the other critical issue to consider when you get divorced is how to boost your retirement provision, especially if you intend to enter into a new relationship. Divorced people often have to redouble their savings efforts to make up for the divorce settlement withdrawals and the fact that they’ve missed out on the effect of compound interest, says Thomson.

It is critical to fully understand legislative requirements for pension funds, so you know what happens to your RA after divorce. When you take out a retirement annuity (RA), the underlying policy belongs to the fund and not to you. So you cannot “give” the retirement annuity to your spouse in a divorce order. The current position in terms of the Divorce Act is: a pension fund is permitted to pay a portion or all of the “pension interest” to the member’s former spouse (referred to as the non-member spouse) if this is empowered by a properly-worded court order.

What does “pension interest” mean?

In respect of a retirement annuity fund: the total amount of the member’s contribution to the fund up to the date of the divorce, together with a total amount of annual simple interest (at the official prescribed rate), provided that this does not exceed the fund return.

The introduction of a clean-break principle in 2007 changed the way pension funds are split on divorce. Prior to 2007, the non-member spouse had to wait until the member spouse made a valid claim before his or her claim against the divorce order could be paid.

Today, the clean-break principle allows the non-member’s portion of the pension interest to be paid out or transferred to a fund of his or her choice, as soon as the divorce has been finalised, subject to the provisions of the Income Tax Act. So, the non-member spouse no longer has to wait until the investment matures. So what may happen to your RA when you get divorce?

  • Both you and your spouse are entitled to claim pension interest from each other’s retirement funds. Your spouse can then opt to either transfer this to another retirement fund or take the amount as cash, at which point tax is payable. And in some instances, there might be charges imposed on the amount should the withdrawal be prior to the maturity date.
  • If you emigrate and obtain a divorce in another country, you will have to apply to a South African court to have your divorce settlement recognised and enforced in this country. Your divorce order in another country will not be recognised by a retirement fund in South Africa.
  • The divorce order must set out either a percentage of the fund member’s pension interest or a specific monetary amount.
  • The retirement fund that has to pay out the pension interest must be clearly and correctly named in the divorce order.
  • If the divorce order does not comply with the Divorce Act, you may find that the fund is unable to make any payment of pension interest to the non-member spouse.
  • The retirement fund must be ordered to endorse its records and pay the pension interest as per the divorce order.
  • It is important to note that the pension interest on an RA fund refers to the total of the amount contributed up to a certain date (the date of the divorce) plus the accumulated interest.

In light of the above it is vital that, when drafting divorce orders or settlement agreements, one first establishes whether or not the member spouse has become entitled to a benefit, or will become entitled to one on, or prior to, the date of divorce. If the member has already become entitled to a benefit prior to divorce, the non-member spouse will have no claim to the “pension interest” as contemplated in the Divorce Act. Common law principles and the division of matrimonial assets cover pension benefits that have already accrued to a member at the time of divorce, for example where a member has retired from a fund and has been paid a lump sum benefit.

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