Divorce Law and Pension Benefits in South Africa
When the parties are married in community of property or out of community of property with accrual is it possible to have a claim directly against the pension fund. If the parties are married out of community of property, excluding the accrual then in terms of the Divorce Act, 1979 they are not entitled to claim any benefits from the pension fund directly. One must first establish whether the divorce order is enforceable directly against the fund.
If the Divorce Settlement Agreement is not drafted properly a party may find that the claim against the pension fund might not be enforceable, it is therefore of utmost importance that the Settlement Agreement is drafted properly, otherwise a party will have to approach the court again on application which will involve further legal costs. This happened in the case of Maharaj v Maharaj, where the parties divorced and no mention was made about pension in regard to the division of the joint estate. A claim was made for 50% of the proceeds of the pension benefit, but the court held that a simple division of the joint estate was not sufficient to award a former spouse a portion of the member’s pension interest. The court must make a specific award. The Fund must be specifically named in the court order, preferably with its registration number and the court order must order the fund to endorse its records with the provisions with the order. Once the order has been received by the fund administrator, then, the records can be flagged. The fund will not be liable to pay interest to the non-member spouse as the Divorce Act does not allow payment of interest. The member will in his/her personal capacity be liable for payment of such interest.
So, for the order to be enforceable it must meet all the requirements of section 7(8) of the Divorce Act, namely:
1 The court must award to the non-member spouse a certain percentage of the member’s pension interest;
2 The order by the court must express a percentage of the pension interest.
3 The retirement fund must be named or capable of being ascertained;
4 The retirement fund must be ordered to make an endorsement in its records to ensure that the awarded part of the pension interest is paid to the non-member ex-spouse.
It is important that the parties understand exactly what is meant by “Pension interest”. Preservation funds are not included in the definition of pension interest and so divorce orders cannot be enforced against preservation funds unless they are registered in terms of the new definition of “pension interest” as per below. A preservation fund is a fund in which employees, who leave the service of an employer owing to dismissal (including retrenchment) or resignation, or in the event of the dissolution of the employer’s pension or provident fund, may invest their accrued fund benefits.
With effect from 1 November 2008, certain changes were introduced to the old definitions.
1 Pension or provident funds- Pension interest is defined as basically the fund value at date of divorce (no growth after date of divorce included)
2 Retirement annuity funds- return of contributions plus annual simple interest at a rate determined by the minister from time to time, subject to the simple interest being limited to the actual fund growth (still no growth after date of divorce included)
3 Preservation funds- An attempt has been made to include preservation funds into the definition of pension interest.
Section 37D(6) states that the value of the pension interest is the member’s value of the preservation fund as at the date of divorce. Once established that the divorce decree is enforceable against the pension fund, one need to understand how and when payment is made and what the tax consequences are.
What about tax?
For all divorce orders, even those granted before 13 September 2007, the ex-spouse would be entitled to payment of his/her share of the benefit immediately. The idea is that s/he would be able to invest the money in their personal capacity and enjoy the growth thereon, which seems on the face of it to be more equitable than the old regime.
Further legislative amendments (The Revenue Laws Amendment Act 60 of 2008) have resulted in the tax on the benefit being treated differently depending on the date of the divorce.
a) Divorces effective before 1 March 2009, the benefit will still be taxable in the hands of the member spouse should the non-member spouse select to take the benefit as a cash lump–sum. The member spouse is however able to recover the tax payable from the ex spouse, but is not able to recover the “tax on tax”. The ex-spouse also has the option to transfer the benefit to a retirement annuity fund or to some sort of preservation fund, which has yet to be clearly defined and established, but this transfer occurs after the tax has been paid by the member spouse.
b) Divorces effective after 1 march 2009; the benefit will be taxed in the hands of the non-member ex-spouse if s/he takes the benefit in cash. If it is transferred to another retirement fund, the transfer will be tax-free.
These benefits will be taxed as if the recipient is a separate taxpayer in terms of the new tax dispensation on withdrawal benefits.
B.Proc; AD Dip L Law
Family Law Attorney Abrahams and Gross Inc.