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How pension interest is dealt with upon divorce

The value of the pension interest allocated in terms of the divorce order is limited to the value as at the date of divorce.

An important and relevant question in the divorce process relates to the pension interest of the principal member and how it is dealt with.

The Divorce Act 70 of 1979 was amended on August 1 1989 to make provision for the distribution of pension interest between spouses. Following the amendment, the non-member receiving a portion of the pension interest had to wait until the interest accrued to the member for the interest to become payable, which in some cases could take years or even decades – undoubtedly, an undesirable situation.

In order to address this issue, a so-called ‘clean-break principle’ was introduced in the Pension Funds Act via an amendment to section 37D (1)(d). The amendment became effective on September 13 2007, entitling the non-member to claim payment immediately, not having to wait for payment as in the past. A further amendment was introduced on November 1 2008 to make the ‘clean-break principle’ applicable to all divorce orders – not only effective from September 13 2007 but retrospective to 1989.

So, the amendment of the Divorce Act has facilitated the distribution of pension interest, but with limited application, to take note of. Section 7 (8) of the Divorce Act only provides for the distribution of pension interest of individuals married in community of property or out of community of property with accrual. No distribution of pension interest is possible between spouses where they married after November 1 1984, out of community of property excluding the accrual system.

With reference to the parties’ divorce settlement agreement, individuals married in community of property, or out of community of property with accrual, are entitled to a distribution of pension interest and the allocated benefits can be paid out immediately. However, the next question is: What is the nature, scope and type of pension interest in question?

The Divorce Act defines pension interest as follows:

  • In the case of a retirement annuity, the value of the pension interest will be the lower of premiums paid plus simple interest at the rate prescribed by the minister in terms of the Prescribed Rate of Interest Act, or premiums plus fund return.
  • In the case of a pension or provident fund, it will be the resignation benefit the principal member would be entitled to if he/she were to resign from the pension fund on the date of divorce; and
  • In the case of a preservation fund, it will be the value that the fund member is entitled to on the date of divorce.

So, the value of the pension interest allocated in terms of the divorce order is limited to the value as at the date of divorce. No growth is taken into account.

Therefore, it would be to the non-member’s benefit to withdraw the pension interest from the member’s fund as soon as possible after the divorce, to receive future growth on the pay-out. If it remains in the member’s fund and is withdrawn at a later stage, the non-member will still only be entitled to the value as at the date of divorce.

Some requirements must be met to transfer the allocated pension interest as soon as possible from the member’s fund to the non-member.

First, the divorce order wording must satisfy specific requirements. Without that, the member’s fund will not be able to make the payment to the non-member. The requirements are:

  • The member’s fund will only be able to make payment in terms of a divorce order issued by a high court, regional court, or divorce court.
  • The member must still be a member of the fund as at the date of the order.
  • The member’s fund must be specified by name in the divorce order, and the investment number must be reflected in the order.
  • The percentage or rand value of the pension interest allocated to the non-member should be set out clearly.
  • The court order must provide the member’s fund with a clear instruction to add an endorsement to its records to ensure that the percentage or rand value of the pension interest is allocated and paid out to the non-member.

It is evident that a court order should meet stringent criteria for a pension interest to be paid out to a non-member. Pension interests cannot be paid out based on an inadequate order and the parties must ensure that the wording of the settlement agreements and divorce orders meet the stringent requirements of the funds involved. There have been cases where the wording of court orders had to be amended because they did not meet the criteria, resulting in substantial costs and unnecessary delays.

The non-member has two options when the allocated pension interest is paid out:

  1. The allocated interest can be taken in cash but will be subject to tax.
  2. The allocated interest may be transferred to an approved fund. Once the non-member’s choice has been communicated to the member’s fund, the fund must finalise the benefits within 60 days.

The table below indicates which transfers will be tax-free:

Member’s fund Tax-free to Non-member’s approved fund
Pension fund            → Pension fund
Pension fund            → Pension preservation fund
Pension fund            → Retirement annuity
Pension preservation fund            → Pension fund
Pension preservation fund            → Pension preservation fund
Pension preservation fund            → Retirement annuity
Provident fund            → Pension fund
Provident fund            → Pension preservation fund
Provident fund            → Provident fund
Provident fund            → Provident preservation fund
Provident fund            → Retirement annuity
Provident preservation fund            → Pension preservation fund
Provident preservation fund            → Provident fund
Provident preservation fund            → Provident preservation fund
Provident preservation fund            → Retirement annuity
Retirement annuity            → Retirement annuity

Considering the above, in the divorce process individuals should make sure that the wording of settlement agreements is accurate and executable. A divorce is a traumatic event, and the parties would want to finalise the proceedings as soon as possible reaching a clean break. Unfortunately, an inadequate settlement agreement has the opposite effect – not only delaying the distribution of pension interests, but also leading to additional legal costs and unnecessary delays.

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Tian Ebersohn

PSG Wealth Pretoria-East

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