What happens to pensions on divorce?
The first question to ask is – what marital regime applies? Entitlement to asset sharing of any description is determined by whether or not the marriage is in or out of community of property, and, if out of community of property, whether it is with or without accrual. If there is no antenuptial contract (ANC), the default regime is in community of property.
Matrimonial regime
If the marriage is out of community of property, then neither party has a right to the assets of the other, including pensions. They each leave the marriage with the property they brought to it and with any assets they secured independently during the period of marriage. If the marriage is in community of property, or out of community of property with accrual, it gets more complicated.
Because the division of pensions is so complex, for illustrative purposes we will assume that one spouse is a member of an occupational scheme (“the member”) and the other spouse has no pension provision apart from the anticipated share in the proceeds of the scheme at retirement (“the non-member”). Historically, this was the situation for many couples where the husband was the breadwinner and the wife looked after the home. Now of course many couples are professionals with two incomes and two pension pots; but the traditional scenario of member/dependent non-member is useful for the sake of illustration.
Pension interest
“Pension interest” refers to the fund benefit at time of divorce and the entitlement of the non-member to a portion of that fund. The Divorce Amendment Act 7 of 1989 provided that: ‘In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall…be deemed to be part of his assets.’ What this means is that the court granting the divorce decree can now order that ‘any part of the pension interest of that member which, by virtue of subsection (7), is due or assigned to the other party to the divorce action concerned, shall be paid by that fund to that other party when any pension benefits accrue in respect of that member’.
In simple terms, the award to the non-member spouse of any part of the member spouse’s “interest” is calculated as at the date of the divorce, but takes effect (is paid) at a date in the future when the pension benefit accrues to the member spouse. In this way the fund continues to grow for the benefit of both parties on retirement.
However, the PFA also gives the non-member spouse the right to take the pension interest allocation as a lump sum in cash or reinvested into another retirement fund at the date of divorce.
Clean break
This provision is known as the clean-break principle. The clean-break principle was introduced by the 2007 amendments to the Pension Funds Act 24 of 1956 (PFA) and extended to private sector retirement funds by amendment on 1 November 2008. “Clean break” describes the right or entitlement of the non-member spouse who is married in community of property to receive immediate payment or transfer of the portion of the other spouse’s pension interest allocated to them upon divorce. Certain public pension funds are not regulated by the PFA and therefore the clean-break principle does not automatically apply to members of these schemes.
There can be no pension interest in an annuity or if the member spouse has left the fund. Exiting a fund is a common tactic employed to avoid sharing a pension. Technically the proceeds would be part of the joint estate. However, it can be difficult to recover the spouse’s share of benefit if the member has spent the money. For this reason a good divorce lawyer will often ask the fund administrator to put a hold on any claims pay-out until the divorce is finalised.
Use precise wording
The wording of the Divorce Order is crucial. If the language is imprecise and the pension fund not correctly cited by name, the fund administrator may reject the claim. The administrator can make the payment only if the Divorce Order is binding on the fund, which means it must meet certain conditions. Any errors in the Divorce Order will require an amended order from the court.
To be binding, the Divorce Order must make specific reference to “pension interest”. The fund must be named or it must be clear from the wording which fund is meant. The Divorce Order must also contain the percentage or rand value of the pension interest to be assigned to the non-member spouse.
Seek the guidance of an expert divorce attorney
This is an overview of pension entitlement on divorce, but each situation is unique. Achieving fair and equitable sharing of pensions requires professional advice. Contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za to discuss your case in confidence. SD Law and Associates are experienced family law attorneys who will look after your interests and ensure a fair settlement that respects all parties.