There is one further exception: in terms of the Divorce Act, a pension fund is permitted to pay a portion of the pension benefit to the member’s former spouse (referred to as the non-member spouse).
This is a sensitive and contentious issue, and fund administrators stick to the letter of the law when processing such pay-outs, to avoid any liability. So progress is slow at the best of times, but even more so when all the legal requirements are not met.
If you are getting divorced, and intend to claim against your spouse’s retirement fund benefit, it is therefore important that your claim meets the required standard. In this note we discuss the law and attendant issue on such divorce payments.
In summary: the binding divorce order
We are frequently asked why the payment of a benefit arising from divorce has not happened, or is unduly delayed. Although we would not know the specific reason, it is usually because the underlying instruction does not comply with either the Divorce Act or the Pension Funds Act.
A fund can only make a divorce payment if the divorce order is binding on the fund. And to be binding, it must meet certain conditions:
- The divorce order must specify the pension interest assigned to the non-member spouse. In other words, the percentage or amount of pension interest (the decree must specifically use this term) assigned to the non-member spouse must be clear.
- The fund must be identified by name or at least identifiable from the order. A simple reference to the member’s “retirement fund” does not suffice.
- The fund must be ordered to pay the non-member spouse. In other words, there must be an order to pay, and the order must be directed at the fund (not the member, for example).
- The divorce order must be valid, ie issued by a High Court, regional court or divorce court.
- The member must still be a member of the fund on the date the divorce is granted.
If the divorce order is not binding on the fund, the administrator should inform the non-member spouse accordingly. However, the flaw cannot be amended by agreement between the parties, the court order must be amended.
The Divorce Act
S7(7) of the Divorce Act provides that pension fund savings (this includes provident, retirement annuity fund and preservation fund savings) form part of the member’s assets in the event of a divorce, and must be considered when dividing the marital assets. On divorce, the non-member spouse may be entitled to a share of their ex-spouse’s pension interest (anywhere between 0% and 100%).
This does not however apply to a marriage out of community of property, by way of an ante-nuptial contract that excludes community of property, community of profit or loss, or the accrual system.
This share must be set out in the settlement agreement, which must form part of the final divorce order. If the parties have not agreed to a settlement, the court can make the order.
S7(8) provides that the court granting a divorce order to a fund member may order that any part of the “pension interest” which, by virtue of subsection (7) is assigned to the other party in the divorce, shall be paid by that fund to that other party. The Act defines the “pension interest” as follows:
In respect of a member of a pension, provident or preservation fund: the benefits to which the member would have been entitled to in terms of the fund rules, if their fund membership has ended on the date of the divorce by virtue of resignation from the fund.
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.
To definition of “pension interest” implies that the divorce order must have been granted before the member exited the fund. Once the member has withdrawn from the fund, no pension benefit remains, and the pension interest is therefore zero. The non-member spouse would then have to recover their share of the pension benefit from the member spouse directly.
The Pension Funds Act
The Pension Funds Amendment Act, 2007, introduced the clean-break principle. This allows the non-member spouse to access their former’s spouse’s retirement fund benefit, and have an amount or percentage (as stipulated by the divorce decree) paid out, or transferred to another fund.
S37 of the Pension Funds Act permits the fund to give effect to a divorce decree per s7(8) of the Divorce Act. The “pension interest” assigned to the non-member spouse is deemed to accrue to the member on the date of the divorce decree.
The non-member’s share must be deducted by the pension fund(s) identified in the divorce decree, or by the fund to which the pension fund was subsequently transferred. In other words, if a pension benefit is not paid out, but is transferred to another fund, then that fund must give effect to the divorce decree.
It must be deducted on the date on which the non-member spouse makes their election, or if no election is made within the stipulated 120 days period (see below), the date on which that period expires.
The timeline to give effect to a divorce decree is as follows:
- Once the non-member spouse has informed the pension fund of the divorce decree, the fund must request the non-member spouse to make their election (cash withdrawal or transfer to another fund) within 45 days.
- The non-member spouse has 120 days to make an election and provide the necessary details, to give effect to the election (ie bank account or new fund details).
- The fund must transfer or pay the amount within 60 days. Payments after this date attract penalty interest.
- If the non-member spouse fails to make an election in the prescribed period (120 days), then the fund must, within 30 days thereafter, pay the cash amount the non-member spouse.
- If the fund cannot effect this cash payment, the benefit (including any fund return) must remain within the pension fund until the required details to make the payment are made available to the fund.
The non-member spouse is entitled to the fund return from the time the deduction (date of the election) is made until the payment date, but not to any other interest or growth. The timeline above suggests that it can take almost 8 months, to effect a divorce pay-out, even if everything goes according to plan and all documents are in order.
The divorcing parties should be aware of (and consider) the tax consequences that attach to the payment of a retirement fund benefit, especially if the divorce order defines the pension interest as a fixed rand amount.
This law on this has changed in recent years. As it now stands, if the divorce order is dated after 13 September 2007 and the deduction is made after 1 March 2009, then the non-member spouse receiving the payment (the member spouse stays invested in the fund) is liable for the lump sum tax on the payment (per the withdrawal lump sum tax table). If no lump sum is taken and the pension interest is transferred to another retirement fund, then no tax is due. The proceeds are then taxed in the hands of the non-member spouse as per usual, either upon withdrawing or retiring from the fund.
The Government Employees Pension Fund (GEPF) Law introduced the clean-break principle in 2012. Previously, the non-member spouse had to wait until the member (former) spouse left the fund. From 1 April 2012, the non-member spouse can claim their share of the member spouse’s pension interest after the divorce is granted, either by withdrawing the cash or transferring to another pension fund.
The withdrawal creates an equivalent debt against the member’s benefit. This debt attracts interest. This can either be paid off by the member, or it will reduce the value of their benefit when they leave the fund.