How pension interest is dealt with upon divorce
A pertinent concern during divorce procedure is how the principal member’s pension stake is handled.
Although the Divorce Act 70 of 1979, as amended on 1 August 1989, provides for the distribution of pension interest between spouses, the non-member receiving a portion of the pension interest had to wait until the interest accrued to the member before it became payable, which could take years.
To solve this issue, the ‘clean-break principle’ was incorporated into the Pension Funds Act on 13 September 2007 by an amendment to section 37D (1)(d), allowing the non-member to collect payment immediately. A subsequent modification (from 1 November 2008) extended the ‘clean-break principle’ to all divorce orders dating back to 1989.
This, however, was applicable only to those who were married in community of property or who were married outside of community of property with accrual.
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, subject to the terms of the parties’ divorce settlement agreement.
In the event of a retirement annuity, the pension interest is calculated as the lesser of the premiums paid plus simple interest at the rate prescribed by the minister under the Prescribed Rate of Interest Act, or premiums plus fund return.
In the event of a pension or provident fund, it is the resignation benefit to which the principle member is entitled if he or she resigns from the pension fund on the day of divorce; and it will be the value to which the fund member is entitled on the date of divorce in the case of a preservation fund.
As a result, the value of the pension interest allocated pursuant to the divorce decree is restricted to its value at the time of the divorce, with no increase factored in.
It would thus be in the non-member’s best advantage to withdraw the pension interest from the member’s fund as soon as feasible in order to benefit from future growth on the pay-out.
Certain procedures must be met before the allotted pension interest can be transferred from the member’s fund to the non-member.
To begin, the divorce order’s wording must adhere to certain requirements and the member’s fund may provide payments only in accordance with a divorce decree entered by a high court, regional court, or divorce court.
The member must be a current member of the fund at the time the order is issued, and the divorce order must identify the member’s fund by name and include the investment number. The percentage or rand value of the pension interest that to be allocated to the non-member should be specified plainly.
The court order must include a clear directive for the member’s fund to add an endorsement to its records to ensure that the non-member receives the percentage or rand worth of the pension interest.
When the interest is paid out, the non-member has two options:
- The allotted interest may be withdrawn in cash but will be taxed.
- Interest earned on the allocation may be moved to an approved fund.
Once the non-preference member’s is notified to the member’s fund, the fund has 60 days to finalise the benefits.
Written by Heinrich Gonzales, Director of HFG Attorneys Inc.
The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.