Divorce can be a distressing, life-altering event that has a wide range of social and financial implications. The correct investment management of retirement savings can be crucial for a comfortable retirement. The question is, ‘what exactly are spouses entitled to?’ There are three matrimonial property regimes:
- Marriage in community of property,
- Marriage out of community of property without accrual, and
- Marriage out of community of property with accrual.
Depending on which one you’ve agreed upon, there may be a sharing of assets you own individually or jointly when you get divorced. If you have a retirement annuity, you typically know that there are applicable restrictions such as only being able to access the money once you reach 55 years of age. However, according to the Pension Funds Act (PFA), there can be certain situations when a deduction may be made from a pension benefit. One such exception is typically known as a “pension interest” deduction.
What happens to your retirement savings may be a pertinent issue for many divorced couples. Here’s what you should know.
What is your spouse entitled to?
After 2007, South African legislation introduced the “clean break principle”, which allowed for the non-member spouse to receive his/her share of the benefit at divorce; it’s referred to as “pension interest”.
What is pension interest?
Pension interest is generally an amount based on the benefit you would normally have received had you retired from the specific retirement fund on the date of divorce. Therefore, it can be calculated as of that date and shouldn’t consider the marriage duration or whether you were married when you became a retirement fund member. There are two types of funds from which pension interest can be received.
- Retirement annuity fund
- Retirement fund (excluding retirement annuity fund)
Does pension interest apply to all matrimonial property regimes?
Suppose you haven’t concluded an antenuptial contract. In that case, you are married in community of property; in this regime, each spouse has a 50% claim to all assets and liabilities in the estate upon divorce.
If you do not want to have a joint estate, you should conclude an antenuptial contract, either with or without accrual.
- If without accrual, spouses may keep their assets.
- If with accrual, the spouse with the larger accrual should be responsible for paying the difference between her/his accrual and the spouse’s accrual.
What are the non-member spouse’s choices?
Once the divorce order is received and approved by the retirement fund, the non-member spouse can choose to take the benefit as a cash lump sum or have it transferred into another retirement fund.
Who is responsible for paying tax?
According to the Income Tax Act, should the non-member spouse choose to take a lump-sum payment, he/she is responsible for the tax on the benefit. If the benefit is transferred into another approved retirement fund, the amount won’t be taxed.
However, should the non-member retire or withdraw from the newly established retirement fund, he/she is generally liable for tax on the retirement or withdrawal benefit.
What about living or life annuities purchased with retirement benefits?
At this time, pension interest shouldn’t apply to a mandatory annuity, such as a living annuity. Once a member has left the fund, the pension interest in the retirement fund ceases to exist.
Finally, should you be in the process of a divorce, remember that the wording of the court order and settlement agreement should be in line with legal requirements; if not, it may result in further legal costs and delays.