Retirement Planning: Divorce

Recent amendments in Pension Fund Act, now make amounts awarded in terms of these orders payable on the date the divorce order is granted. The Pension Fund Amendment Act ii of 2007 introduced what has become the clean break principle. The clean break principle is the entitlement of the non-member spouse to receive immediate payment or transfer of the portion of the member’s pension interest allocated to him or her thereby effecting a clean break between the parties as far as the non-member’s claim to a portion of the members pension interest is concerned.

The non-member will not acquire the rights of a member or beneficiary in relation to the pension fund. The non member shall be entitled to the accrual of interest on the assigned amount at fund return from the expiry date of a period to date of transfer.

Tax - 37D (i)(d)(ii) allows the deduction of tax on any pension interest paid in respect of a non-member spouse in terms of a divorce order as contemplated in section 7 (8) of the Divorce Act, from a fund members benefit or minimum individual reserve.

In terms of section 37D(1)(e) where a court orders the deduction of an amount from an active members benefit in respect of a section 7(8) divorce order, the amount and tax thereon will be deemed to accrue to the member (and therefore be taxed) on the date of the deduction.

Where a non-member spouse transfers the amount of pension interest allocated to him or her to a retirement fund, the transfer will not be tax free, but the amount will not be taxed upon retirement.

Check list for lawyers (in terms of section 7(8) of the Divorce Act:

i) Identify all the retirement funds the member belongs to – ensure the relevant funds is/are correctly identified by virtue of their employment. The court must clearly identify which funds are to be included.

ii) Establish the value of the members spouse’s pension interest. The pension interest can be no more than the (cash) resignation benefits as at the date of divorce in respect of pension and provident funds. In respect of Retirement Annuity Funds the pension interest is the aggregate of contributions plus 15.5% simple interest.

iii) Previous Divorces: Establish if any award was made to any previous divorce orders in which case such amount awarded does not form part of the pension interest available to be divided.

iv) Factors to be taken into account when deciding on the basis on which the division should take place.

The “pension interest” defined in the Divorce Act is the gross benefit. This amount may be subject to other deductions in terms of the rules of the fund.

The following should be taken into account to determine the net pension interest available:

Prior claims:
• any existing housing loans; or
• Pension backed securities provided by the fund in terms of section 37 D
• Any maintenance orders envisaged in section 37A
A failure to take prior claims into account may result in a refusal by the fund to make payment on account of the fact that there are conflicting claims.

Taxation:
• Any tax payable on the benefit in terms of paragraph 2(a), 2(b) or 2B of the second Schedule of the income tax act. If tax is not taken into account at this stage the member will be prejudiced.
v) The divorce order: Ensure that the court in terms of section 7(8) of the Divorce Act, order the fund/s identified to make payments of a computable amount to the spouse in terms of Section 37D. Serve the order on the fund:

vi) Ensure that the fund/s receives a copy of the Section 7(8) order. The former spouse must also advise the fund if the amount allocated must be paid directly to him/her, or to be transferred to another fund.

Reference: The Manual on South African Retirement Funds and other Employee Benefits – Marx & Hanekom

Decision Tree re: Divorce Orders
(after promulgation of the Financial Services Laws General Amendment Act (Act No. 21 of 2008) and the 2008 Revenue Laws Amendment Bill)

Reference: Pension World December 2008 – Mientjie Botha

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