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Divorce and Retirement Funds

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Divorce and retirement funds

By Paul Nell, Legal Adviser: Financial Planning Advice and Wealth Management


You could argue that in recent years there is an additional certainty in life aligned to the existing two, namely: taxes (more taxes), death, and it seems, divorce. The Department of Justice and Constitutional Development’s Annual Report 2012/2013 confirms that SA is the infamous front runner with regard to matrimonial woes and mistakes as the figures ratify that the divorce rate increased by 28% from 39 573 to 50 517 cases.

In addition, the Sunday Times, reported that, “Divorce lawyers and marriage councillors say, however, that sex and money is behind the spike. They say that adultery, unrealistic expectations and a lack of sexual intimacy play a huge part in this”. In addition, the median age at divorce in 2012 for men was 42 years and 38 years for women.

In the financial planning world it is almost unavoidable that you will at some stage deal with a client’s divorce. It is absolutely crucial that financial planners engage with their clients and their attorneys, especially when the parties address the division of retirement funds.

Prior to 1989 amendment

The Divorce Act was amended in 1989 to allow for the division of the ‘pension interest’ of a member upon divorce (excluding those married out of community of property without the accrual).

Prior to the amendment, the non-member spouse had to wait until the pension benefit accrued to the member (usually at retirement, death or resignation). Also, it was common practice for some members to delay retirement in respect of the retirement annuity fund for as long as possible – just to get in the last stab, and thereby delaying the obligation to pay for as long as possible. A further concern was that the non-member spouse did not enjoy any growth on the awarded portion from the date of divorce until the eventual payment date.

Based on this amendment, the impact of the marital system on the division the pension interest upon divorce can be illustrated as follows.

The ‘Clean Break’ principle

Enter the ‘Clean Break’ principle, which was introduced in the Pension Funds Act through the amendment of Section 37D(1)(d) (effective 13 September 2007). This change allowed a retirement fund to deduct from the member’s benefit or minimum individual reserve any amount assigned to a non-member spouse in terms of a decree of divorce order granted under the Divorce Act. A further amendment was made in 2008 to make the ‘clean break’ applicable to all divorce orders granted after 1989.

The impact of this amendment is that the amount allocated to the non-member spouse in respect of the member spouse’s pension interest, has to be paid to that non-member spouse at the time of the divorce. Thus, the non-member spouse no longer has to wait until the benefit accrues to the member spouse. The fund can then either pay the amount to the non-member spouse or the non-member spouse can elect to transfer it to another approved retirement fund. Thereby, non- member spouses can enjoy growth on the funds until their retirement date.

What is the meaning of ‘pension interest’?

A thorough understanding of what constitutes ‘pension interest’ is imperative when you engage with a client that is in the process of getting divorced. You need to distinguish the difference of the definition of a pension interest as it applies to a pension fund (herein including a pension fund, provident fund, pension preservation fund and provident preservation fund) and a retirement annuity fund.

‘Pension interest’ is defined in the Divorce Act and it reads as follows:

  • in respect of a member of a pension fund (includes provident funds and preservation funds) – the benefits to which the member would have been entitled in terms of the rules of the fund if their membership of the fund would have been terminated on the date of the divorce on account of their resignation from their office; and

  • in respect of a member of a retirement annuity fund

– the total amount of the member’s contributions to the fund up to the date of divorce, together with a total amount of annual simple interest on those

contributions up to that date, calculated at the same rate as the rate prescribed…

The interest rate prescribed is currently 9% per annum (changed from 15.5% with effect from 1 August 2014).

Let us look at why this is so contentious in practice.

Wording of the divorce order must bind the retirement fund

Without a doubt, an area that causes conflict between the parties and the trustees of the retirement fund is the wording of the divorce order. In order for the retirement fund to give effect to the divorce order it must fulfil three requirements.

Division of pension interest

The divorce order must be clear with regard to what percentage of the pension interest or what amount is due or assigned to the non-member spouse. For example, the requirement will be satisfied where the wording states that “the non-member spouse is entitled to 50% of the member’s pension interest”.

Identification of the retirement fund

It is crucial that the fund is named and is identifiable from the divorce order. Most divorce orders will name the retirement fund and also provide the appropriate policy or membership number.

Fund must be ordered to pay

Of the said requirement it is this one that is most problematic as the divorce order must specifically order the retirement fund to pay the amount to the non- member spouse.

Suggested wording:

  • The defendant is a member of the ABC Provident Fund (‘the fund’).

  • The plaintiff is entitled to 50% of the defendant’s pension interest in the fund as defined in Section 1 of the Divorce Act*.

  • The fund is ordered to pay or transfer the assigned portion of the pension interest to the plaintiff

or an approved fund on her behalf in terms of Section 37D(4) of the Pension Fund Act.

*In the case of a preservation fund the reference should be to Section 1 of the Divorce Act, read together with Section 37D(6) of the Pension Funds Act.

Where the divorce order is not binding on the retirement fund, the defective order will need to be amended. This will result in the parties having to make application to the relevant court and further costs will be incurred. A new divorce order will need to be issued by the relevant presiding judicial officer.

Who pays the tax and when?

Where the non-member spouse takes a cash lump sum from the fund, the income tax rules are as follows.

Financial planning impact: Non-member spouse elects to take monies in cash versus transferring to an appropriate retirement vehicle


From a financial planning perspective it is imperative that the financial planner is included in the negotiations between the respective parties at the divorce negotiation stage. In addition, the financial planner must ensure the implication pertaining to ‘pension interest’ with regard to the retirement vehicles under discussion are understood by the parties as well as their respective attorneys.

The article is courtesy of Momentum's Leverage Newsletter, August 2015


Department of Justice and Constitutional Development. Annual Report 2012/2013. Available: http://www.justice. Accessed 6 August 2015.

Joubert, H. 2015. Legal Update, (6), March.

Statistics South Africa. 2012. Statistical Release (P0307): Marriages and Divorces 2012. Available: http://beta2.

Accessed 6 August 2015

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