Divorce and Pension Funds
In South Africa, pension funds are often a significant asset in divorce settlements. We understand that your pension is a critical part of your financial security. This page provides guidance on navigating the complexities of pension division in divorce.
In South Africa, a pension can be defined as a form of retirement savings that provides income during retirement. It's essentially a fund built up over time, typically through contributions from an employee and/or their employer, designed to provide financial security after a person stops working. Pensions are regulated by the Pension Funds Act and aim to provide a regular income stream to replace the salary or wages earned during employment.
Dividing Retirement Funds in a South African Divorce: A Simplified Guide
Dividing retirement funds (pension, provident, and retirement annuity funds) during a divorce can be complex. It's crucial to have a clear understanding of the process and your rights to ensure a fair settlement. At Aucamp Attorneys, we specialize in divorce law and can help you navigate these complexities.
Why Proper Drafting is Essential
A common problem is poorly drafted settlement agreements that are rejected by retirement funds. This leads to costly court applications to fix the errors. It's vital to have your retirement fund clause drafted by a specialist divorce attorney to avoid these issues.
Understanding Retirement Fund Types
The term "pension fund" is often used generically, but there are different types:
- Pension Funds Typically, at least two-thirds of the benefit must be taken as an annuity (regular income).
- Provident Funds Allow members to take the entire benefit as a lump sum.
- Retirement Annuity Funds (RAs) Retirement plans outside of the workplace, often set up individually.
- Preservation Funds Used to preserve retirement benefits transferred from a pension or provident fund.
Key Legal Considerations
The division of retirement funds is governed by the Divorce Act and the Pension Funds Act. A claim can usually only be made while the spouse is still a member of the fund. Once they've withdrawn the funds (usually at retirement), the "pension interest" no longer exists.
How Marital Regimes Affect Claims
- Community of Property Each spouse has a claim against the other's pension interest. The non-member spouse is typically entitled to 50% of the pension interest at the date of divorce.
- Accrual System The pension fund value is considered when calculating the accrual (growth of each spouse's estate during the marriage), but the division of the pension interest itself follows similar principles as community of property.
- Out of Community Property (Before 1 Nov 1984) Pension interest is part of the spouse's separate estate and may be subject to redistribution by the court.
- Out of Community Property (After 1 Nov 1984) Spouses retain separate estates. Sharing of pension interest requires mutual consent or a settlement agreement.
The "Clean Break" Principle
The Pension Funds Amendment Act introduced the "clean break" principle. This allows the non-member spouse to receive their share of the retirement savings directly from the fund at the time of divorce, rather than waiting for the member spouse's retirement. This can be a lump sum or a transfer to the non-member spouse's own retirement fund.
Pension Interest
"Pension interest" has a specific legal definition:
- Pension/Provident Fund The benefit the member would have received if they resigned on the date of divorce.
- Retirement Annuity The total contributions plus simple interest (or fund return, whichever is lower) up to the date of divorce.
- Preservation Fund The benefit the member would receive if their membership terminated on the date of divorce.
It's crucial to understand that "pension interest" applies to unaccrued benefits within the specific fund types, not to actual pensions already being paid out or to retirement savings already withdrawn.
Divorce Settlement Agreements and Orders
- Correct Fund Name Use the exact legal name of the fund, not just the administrator's name (e.g., Old Mutual).
- Specific Wording The divorce order must specifically mention "pension interest" (as defined in the Divorce Act or Section 37D(6) of the Pension Funds Act for preservation funds). Vague terms are not sufficient.
- Percentage or Amount Clearly state the percentage or specific amount of the pension interest to be assigned to the non-member spouse.
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How Pension Interest is Calculated
For RAs, pension interest is the total contributions plus simple interest (or fund return, if lower) up to the date of divorce. The non-member spouse's share is usually calculated from the date the court order is submitted to the fund. In preservation funds, previous withdrawals can affect the calculation.
Choosing the Right Option
The non-member spouse has the right to choose how they receive their share (lump sum or transfer). Several factors need to be considered:
- Is it a preservation fund?
- Should the benefit be taken in cash or transferred?
- If taken in cash, how will it be invested?
- Excluding Pension Interest
Pension interest can be excluded in an antenuptial contract. For accrual marriages, the value of the retirement fund at the time of marriage must be explicitly excluded in the contract.
Basic differences between Retirement Funds on Divorce
There are some key differences in how pension funds, provident funds, and retirement annuities (RAs) are treated upon divorce in South Africa, although the overarching principle is to ensure a fair and equitable division of the retirement savings accumulated during the marriage. Here's a breakdown:
1. Pension Funds:
- Accrual: The portion of the pension interest that accrued during the marriage is considered part of the joint estate (if married in community of property or subject to accrual sharing). This is the amount subject to division. The portion accrued before or after the marriage is generally excluded.
- Payment: Pension funds are typically paid out as a monthly income stream upon retirement. In a divorce, the ex-spouse is entitled to a portion of that future income stream, often through a pension interest claim. This is usually structured as a separate payment directly from the pension fund to the ex-spouse upon the member's retirement. It's not usually a lump-sum payment at the time of divorce. However, some funds may allow for a lump-sum payment under specific circumstances, but this is not the norm.
- Valuation: The value of the pension interest needs to be determined by an actuary. This can be a complex calculation.
2. Provident Funds:
- Accrual: Similar to pension funds, only the portion that accrued during the marriage is considered part of the joint estate and subject to division.
- Payment: Provident funds often allow for a lump-sum withdrawal upon retirement. In a divorce, the ex-spouse's share is typically paid out as a lump sum at the time of the divorce, rather than as a future income stream. This is a significant difference from pension funds.
- Valuation: The value of the provident fund is usually easier to determine than a pension interest, as it's often based on the current value of the fund.
3. Retirement Annuities (RAs):
- Accrual: The portion of the RA that accrued during the marriage is subject to division.
- Payment: RAs have specific rules regarding access to the funds before retirement age. Generally, you cannot access the funds until age 55 (unless there are specific exceptions). In a divorce, the ex-spouse's share is typically calculated and then paid out when the member reaches retirement age, similar to a pension interest claim. However, some RAs might allow for a transfer to another approved RA in the ex-spouse's name at the time of divorce.
- Valuation: The value of the RA is usually determined based on its current market value.
Section 7(8) of the Divorce Act 70 of 1979
Section 7(8) of the Divorce Act 70 of 1979 in South Africa is a crucial provision that empowers the court to order the direct payment of a portion of one spouse's pension interest to the other spouse upon divorce. Here's a breakdown of the key aspects:
Empowering the Court -Section 7(8) grants the court the authority to order that a specific share of one spouse's (the member spouse's) pension interest be paid directly to the other spouse (the non-member spouse) when they divorce.
Pension Interest - It's important to note that "pension interest" has a specific legal definition, referring to the portion of the retirement fund that accrued during the marriage.
Direct Payment - The court order issued under Section 7(8) instructs the relevant pension fund to make the payment directly to the non-member spouse. This is significant because it ensures the non-member spouse receives their share without relying on the member spouse.
Requirements for the Order - For a Section 7(8) order to be valid and enforceable against the pension fund, it must meet certain requirements:It must specifically refer to "pension interest" as defined in the Divorce Act.
- It must clearly identify the specific pension fund from which the payment is to be made.
- It must state the exact percentage or amount of the pension interest to be awarded to the non-member spouse.
- It must explicitly order the pension fund to endorse its records and make the payment to the non-member spouse.
Importance of Section 7(8) - Protection for the Non-Member Spouse: It safeguards the non-member spouse's share of the retirement savings, ensuring they receive what they are entitled to.
- Clarity and Certainty: It provides a clear legal mechanism for dividing pension interests, reducing the potential for disputes and delays.
- Enforceability: A properly drafted Section 7(8) order is binding on the pension fund, compelling them to make the payment to the non-member spouse.
We Can Help
Dividing retirement funds in a divorce is complex, and errors can be costly. Contact Aucamp Attorneys for expert legal advice to protect your rights and ensure a fair settlement.