Claiming ex-husband/wife pension after divorce
It is important that the retirement fund clause in a divorce settlement agreement is drafted by an attorney who specialises in divorce law. It happens frequently that clauses are badly drafted that a fund rejects a claim. A substantive application to court is then necessary to rectify the bad drafting. The term ‘pension fund’ is both a generic name for all types of retirement funds that fall within the scope of the Pension Funds Act, and a descriptor of a specific type of pension fund, one in which at least two-thirds of the retirement benefit must be taken as an annuity. Other types of pension funds are provident funds, where the member may take the entire retirement benefit in cash, retirement annuity funds for retirement plans outside of the occupational/workplace environment, and preservation funds, to which benefits from a pension fund can be transferred.
One should never rush into dividing up pension and/or retirement funds in a divorce settlement. It frequently happens in divorce cases that pension fund administrators reject settlement agreements on the basis that the clauses dealing with the pension interest payout to a non-member spouse are drafted incorrectly. It is therefore important that the clauses dealing with pension pay-outs be drafted properly. If not drafted properly, application will have to be made to the court at great cost to amend or vary the settlement agreement.
A claim under the Divorce Act can only be brought where the husband/wife or a partner in a civil union is still a member of the fund. Once he/she exits from the fund, usually on retirement or as a result of an early withdrawal, the benefit accrues to him/her, and there is no longer any ‘pension interest’ or unaccrued benefit. If the benefit accrues before the date of divorce, it must be dealt with as any other asset in the separate or joint estate.
Where couples are married or in a civil union in community of property, each partner will have a claim against the other’s pension fund. The claim will be for half of the pension interest on the date of divorce.
Pension fund in community of property and other marital systems in South Africa
Marriages in community of property
The pension interests of the spouses will form part of the parties’ joint estate and the non-member spouse will be entitled to claim 50% of the pension interest of the member as at the date of the divorce.
Marriages out of community of property with accrual
Where couples are married out of community of property with the accrual, the spouse’s pension fund value will be taken into consideration in order to determine the value of his/her estate for purposes of the accrual calculation only.
Marriages out of community property without accrual before 1 Nov 1984
The spouses retain their own separate estates and there is no sharing of assets at divorce, unless a court orders a redistribution of assets in terms of Section 7(3) of the Divorce Act. A pension interest forms part of the spouse’s estate and will then form part of the assets if redistribution is ordered by the court. The parties may also agree to share the pension interest in a settlement agreement.
Marriages out of community of property without accrual after 1 Nov 1984
Here the spouses retain their own separate estates and there is no sharing of assets at divorce. Any share in the pension interest will have to take place by mutual consent. The parties may also agree to share the pension interest in a settlement agreement.
The clean-break principle
The Pension Funds Amendment Act, 2007, introduced the clean-break principle for the treatment of retirement fund benefits upon the granting of a divorce decree. The Act allows retirement funds to deduct an amount or percentage upon divorce from a member’s benefit and pay it to the non-member spouse or to a retirement fund of his/her choice. The clean-break principle allows a non-member former spouse to access an agreed or court-ordered share of the member spouse’s retirement savings on divorce.
Any assigned amount may be paid from the member’s pension fund to a non-member spouse in terms of a divorce order granted under the Divorce Act, irrespective of the date of divorce, but may not be more than 100 percent of the value of the member’s withdrawal benefit at the date of divorce. For the fund to make the deduction and payment to the non-member spouse, the fund must be ordered to endorse its records (make a note on the system) to such effect and/or to make payment to the non-member spouse. The non-member spouse can elect to receive a cash lump sum or to have the money transferred to an approved pension fund.
A fund is not allowed to deduct and pay over interest on the amount assigned to the non-member spouse (except where the fund does not pay the non-member spouse within the time frames stipulated in the Act).
The Government Employees Pension Fund (GEPF) was amended to introduce the clean-break principle with effect from 1 April 2012. In the past, the portion of a member’s pension benefit payable to a former spouse as part of a divorce settlement was only paid when the member spouse left the fund. With the new amendments, former spouses will now be able to receive their share of the pension interest soon after the divorce has been completed, either in cash or as a transfer to another pension fund. The new rules state that on the date of payment of a divorce benefit the GEPF will create a debt against the member that is equal to the amount payable to the non-member spouse. The debt amount will build up, with interest, up until the member exits the Fund (and it will be reduced to the extent that the debt is partially repaid over the member’s remaining period of service in the Fund). At the date of the member spouse’s exit from the fund the total value of the benefit will be determined, and will then be decreased by the outstanding amount of debt owed.
Divorce settlement agreements
Citing the fund in the divorce settlement agreement
It is important that the correct name of the retirement fund is used at all times. Uncertainty as to which fund is intended may result in a situation where the fund will not pay out. Divorce settlement agreements are frequently drafted using the name of the insurance company that manages the pension fund instead of the fund itself. It is not sufficient to refer to the administrator (e.g. Old Mutual or Liberty pension fund), as these financial organisations usually operate numerous retirement funds.
Divorce Orders
The Divorce Order must contain :
(i) A specific reference to “pension interest” must be made as defined in the Divorce Act. If the fund is a preservation fund the order must read “pension interest” as defined in section 37D(6) of Pension Funds Act.
(ii) The name of the Fund.
Where the fund is not named, it must at least be possible to determine from the wording of the order which fund the parties had in mind.
For example, the “fund of the member-spouse’s employer” would be ascertainable but the “Liberty pension fund” is not ascertainable since financial institutions operate several funds.
(iii) A specified percentage or amount of the pension interest must be provided.
It must be clear from the order how much of the member’s pension interest has been assigned to the non-member spouse.
The following will generally not be binding:
– An order which stipulates that the pension interest must be divided equally will not be considered binding as it does not indicate that 50% of the pension interest has been awarded to the non-member spouse.
– “Any debts incurred by the non-member spouse after the date of divorce must be deducted from the pension interest” – compliance with a further condition of one of the parties cannot be enforced against the pension interest of a member.
Tax payable on divorce settlement
Separating assets at the time of divorce also has capital gains tax implications for the parties to the divorce. There are roll-over provisions applicable to spouses who are divorced or separated provided that certain legal formalities are complied with. The non-member ex-spouse will pay the tax on the pension interest if he/she takes the benefit in cash. If it is transferred to another retirement fund, the transfer will be tax-free. To find out more about tax implications, visit the SARS website on this link: https://www.sars.gov.za/types-of-tax/capital-gains-tax/exclusions-and-roll-overs/divorce-of-spouses/
