What happens to RA’s, living annuities and pension/provident funds after divorce?
The below article does not constitute advice, as defined by the FAIS Act 37 of 2002.
It is so important to know that regardless of whether or not you have your own retirement savings, upon divorce you are entitled to claim against your Ex spouse’s policies and funds. Conversely, your Ex also has claim against your portfolio. Educating oneself on this issue is imperative.
I always inform my clients to call me first, before they institute divorce proceedings. This ensures that my client is fully aware of what policies and products he/she must discuss with their attorney, to ensure that the Divorce order is correct. It also ensures that my client knows what claim can be made against their own policies and funds.
Regardless of how you are married, The Divorce Act of 1979 overrides the matrimonial property Act.
Divorce and retirement annuities (RA)
It is important to know what happens to your RA after divorce, or equally, if you do not have a RA, what you can claim from your former spouse.
The calculation is as follows: Premiums paid plus 10.25% simple interest. In terms of the ‘clean break’ principle the person who has the claim has the following options:
- Transfer their portion to another RA, receive the money at the selected retirement age and take advantage of the R500 000 tax-free portion
- Take the money out in cash as per the ‘clean break’ principle(This principal allows the claimant to take all money owed to them immediately as opposed to waiting until retirement) but the following tax must be paid on the lump sum:
|Lump sum||Tax payable|
|R0 – R25 000||0%|
|R25 001 – R660 000||0 + 18%|
|R660 001 – R990 000||R114 300 + 27% of taxable income above R660 000|
|R990 001 and above||R203 400 + 36% of taxable income above R990 000|
Divorce and living/life annuities
At retirement, a member is obliged to purchase an annuity that will pay him/her a monthly amount just like a salary.
It must be noted that an annuity does not form part of the pension interest definition and as a result an annuity cannot be assigned at divorce.
In practice the annuity will pay to the owner. Hopefully an amicable agreement can be reached to agree on a monthly figure to be paid to the claimant, if not the other party will have to enforce a maintenance order compelling his/her former spouse to pay a portion over to him/her. This is not guaranteed to happen and the person claiming will need to seek legal counsel to try to enforce this.
The calculated value here is slightly different. The fund administrator must calculate the value of the fund as at the date of divorce.
The divorce order will stipulate the amount that needs to be paid to the former spouse. It can be anywhere from 0% to 100% depending on what has been agreed to by both divorcing parties.
As an example, if the ex receives 50% of the fund value he/she has the following options available:
- Transfer their portion to a preservation fund, receive the money at the selected retirement age and take advantage of the R500 000 tax-free portion
- Take the money out in cash, as per the clean break principle, but tax must be paid on the lump sum as per the retirement annuity tax table.
The Divorce Order
Please note that the divorce order will instruct the pension/provident fund administrators on how to deal with the claim in terms of pensionable interest.
This document is really the most important document in the process.
Here are some tips on this order, based on real cases I have had in my practice:
- The wording with regards to the policies must refer to ‘pension interest’ as this is what can be assigned in the divorce order and determines what figures are used for the clean break calculation
- Words like ‘pension fund’, ‘fund value’, ‘joint estate’, ‘retirement annuity’ and ‘proceeds of the policy’ must be avoided in the order as they are generally not binding.
- The allocated portion to the former spouse must be expressed as a percentage or rand value.
It is unfortunate that I see so many orders that are not enforceable, as they seek to divide pension interest on products that do not allow for it. That is why it is so important to understand the product in question.
Mike Becker CFP®