Dealing with divorce
19 Oct 2016
What happens to your pension fund when you get divorced?
19 October 2016
Some conversations are so important that they cannot be avoided, no matter how tough or awkward they may be. One such conversation is what if ‘happily ever after’ never happens and you unfortunately divorce from your spouse? Specifically, what happens to your retirement money post-divorce? Do you keep all your money? Is your spouse entitled to this retirement money? None of these questions are easy or comfortable to ask, but you need to have the answers to them to prepare for your retirement properly.
Why think about divorce and your retirement plans?
Marriage is a wonderful institution and has proven emotional, psychological and financial benefits for both partners in the union. Many people aspire to marital bliss and building their futures together. However, the harsh reality is divorce is increasingly common in South Africa. According to Stats SA’s
Marriages and divorces report released in February 2016, divorces increased by 3.4% from the previous year. As Liberty Corporate’s Umbrella Fund Solutions* head Arno Loots observes, “The official divorce statistic in our country is high. This means it is important for both married and unmarried employees to understand how divorce proceedings affect their retirement savings.”
Are your savings included as part of a divorce settlement?
In the case of a divorce, the Pensions Fund Act and Divorce Act apply. The Pension Funds Act also has the ‘clean break’ principle, which allows a retirement fund to take a portion of a member’s savings and pay a non-member spouse in the event of a divorce. This amount can be no more than 100% of the member’s retirement savings with the fund.
What happens to the money if my spouse claims?
Depending on the duration and size of your contribution, your savings can be considered a very large asset. It will be split according to the type of marriage, prior settlement agreements and other divorce-related considerations, like any other high value asset, e.g. a car or a house.
As a divorce usually has some form of negotiation, the money in the pension funds will also be subject to these negotiations. Commenting on this process, Loots explains, “Usually there is a settlement agreement that happens, as not all divorces end up in court. The two parties sit down and talk about various things, such as who is going to look after the kids, pay maintenance etc. That conversation also covers all the assets and how they will be split up, including the retirement funds. Once that has been settled, or a dispute arises, the case would go to court, and the court would ratify the divorce order or settlement agreement.”
Based on this divorce order, the fund will then act and pay out the appropriate money to your spouse. “They then bring that divorce order to us (Liberty Corporate) as administrators or the fund. “ This pay-out will only happen if the fund or fund administrators are satisfied that all legal conditions and requirements of the divorce order have been met. “
The spouse has two options:
- Preserve the money and transfer it to a separate retirement fund or annuity.
- Cash-in and pay tax as according to the withdrawal lump sum tax table that can be found
Fund administrators will err on the side of caution and stick to the letter of the law regarding pay-outs in divorce cases and it is crucial you consult your attorney and make the necessary arrangements. As Loots points out, “We can only act on a divorce order, so if the member resigns and changes jobs before we get the divorce order or we do not even know about the divorce order, we can’t act on it.”
Make sure you plan ahead, get the right legal advice and be open with your spouse regarding your marriage, retirement plans and how you will share the assets in the unfortunate case that you get a divorce. It may be uncomfortable, but it will save make things slightly easier in the future, covering your bases.
Listen to Arno Loots discuss what happens to your pension fund when you get a divorce
*Liberty Corporate’s umbrella fund is the biggest umbrella fund in South Africa by member size.