Have you ever wondered what happens to a pension when you divorce? As ugly as divorce is, it happens. Many people assume that the money will simply be split “half half”, but that not necessarily the case. It all depends on the Divorce Order. Let’s take a look at how retirement funds split in a divorce.
How are retirement funds split in a divorce?
Here is a summary version, although you should read the full post to get all the details.
- A Divorce Order must be drawn up to specify how the retirement or pension funds are to be split. This could be anything from 0% – 100%. Your marriage agreement will play a role in this.
- The non-member spouse may opt for an immediate payout, or a payout when the member exits the fund.
- The non-member spouse claiming the monies will pay the tax.
- A payment to the non-member spouse could take up to 8 months to be finalised.
Retirement and divorce
Often times only one spouse is a member of either a pension or provident fund, and should the marriage end in divorce, the non-member would want to claim a portion of the accumulated savings in the fund. This is true for a Retirement Annuity (RA) too.
Of course, both spouses could be members of funds and want to claim from each other.
The Divorce Act allows a non-member spouse to claim a portion of their spouse’s retirement savings as part of the divorce settlement. The retirement fund can be instructed to either immediately pay, or to reserve the proportion (or amount) of the retirement savings payable to the non-member spouse for later payment to the non-member spouse.
Although the type of marriage agreement that you have plays a role, the split of retirement savings, between the member and non-member spouse must be clearly stated in an official Decree of Divorce (referred to as a divorce order). This is issued by a court such as the High Court, a Regional Court or the Divorce Court.
The Divorce Order
The retirement savings can be split in any proportion. The member and non-member spouse can agree on any portion of the benefit payable as at the date of divorce, being paid to the non-member spouse. It can range from nothing to one-hundred percent. The divorce order may also instruct a fixed amount to be paid to the non-member spouse.
The payment to the non-member spouse will be made by the fund administrators, strictly in accordance with the divorce order. The administrators will validate the divorce order and check for certain things before payment is made. It is important that the divorce order is worded correctly as this will ensure a smooth process. It’s worth dealing with an experienced legal professional in this regard.
The Divorce Order should clearly state the name of the retirement fund (or funds should there be more than one fund involved). It should note the proportion to be paid, per fund, to the non-member spouse. It should also state whether the non-member is claiming a lumpsum payment or whether the claim of the non-member spouse to be settled when the member exits the retirement fund.
Whatever the agreement is between the spouse and non-member spouse, it should be accurately captured in the divorce order. This will ensure that the fund administrators are able to make payment efficiently.
It is important to remember that the member against whose retirement benefit is being claimed must still be a member of the retirement fund on the date that the divorce order is granted.
Finally, divorce orders (pension fund divorce settlements) are legally binding and final. You can’t simply decide to change the agreement.
Who pays the tax?
The current legislation is that the person receiving the money pays the tax. If the non-member elects for a cash portion of a payout, they will pay the tax. This is true for any divorces from the past few years. The legislation applies if the divorce order was granted after 13 September 2007, and the deduction was made from the member’s pension interest after 1 March 2009.
Note that any transfer to another approved retirement fund will not attract tax at the time of transfer.
Related: What are the tax implications of cashing out your Provident Fund?
What about transfers and emigration?
There are occasions when you may transfer from one Retirement Fund to another.
If a retirement fund transfers the benefit of a member to another retirement fund before a valid divorce order is served upon it in respect of the member, the retirement fund to which the transfer was made will be required to effect to the provisions of the divorce order.
A member who has emigrated and subsequently divorces in that country must apply to a South African court to have the divorce order recognised and enforced in South Africa. This is an added complication and expenses in the divorce process.
How long does it take for pension fund to pay out after divorce?
There is a lot of admin and waiting time involved in this process. In fact, it could take up to 8 months for the payout, even if everything goes smoothly. Here is a summary of the timeline you could expect:
- 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.
Closing thoughts
A Divorce Settlement can be a messy process, not something I would wish upon anyone. It is however vital that negotiations are held in a fair and reasonable manner. Finalising the settlement as well as the Divorce Order may take some time, and it could take months for payments to be made. It’s certainly recommended to find experienced professionals to assist in each step of the process.
Remember that we are not providing any legal or financial advice. Contact an authorised Financial Advisor.