Legal update: Divorce and pension interest

With the introduction of the “clean break principle” a non-member spouse awarded pension interest in terms of a divorce order no longer needs to wait until the member accesses their retirement fund in order to claim their portion of pension interest. A non-member spouse can now immediately access their portion of pension interest.

How is pension interest calculated in pension and provident funds?

In terms of pension and provident funds, pension interest refers to the percentage of the member’s fund value awarded to the non-member spouse. If the member’s fund value is R1 000 000 and the non-member spouse is awarded 50% pension interest, then the non-member spouse is entitled to R500 000 of the fund value.

How is pension interest calculated in RA funds?

In terms of RA’s, pension interest is calculated based on premiums paid plus simple interest. Let’s use the example above but assume that the member has contributed R700 000 towards the RA. The non-member spouse will be entitled to 50% of R700 000 (premiums paid) plus annual simple interest. Simple interest is currently calculated at 15.5%. To complicate the matter a bit further, Sec 37D(5) of the Pension Funds Act states that the total amount of annual simple interest payable in terms of the definition may not exceed the fund return on the pension interest assigned to the non-member spouse.

Common reasons divorce orders are unenforceable

In order for a fund to pay out to a non-member spouse in terms of a valid court (divorce) order, the retirement fund in question must be identifiable. Often funds are unable to enforce court orders due to the way it is drafted. Remember that Sec 37D of the Pension Funds Act only allows funds to pay out when there is a valid court order. The most common reasons for rejection are that the fund is not identifiable or that the pension interest is not specified. In order to avoid this it is recommended that the retirement fund is named (not the company’s name) as well as the specific contract numbers. This eliminates the ambiguity of a member having more than one retirement product with the same retirement fund. The percentage of the pension interest awarded must also be specified. Using monetary amounts as opposed to the percentage can lead to an order being rejected on the basis of the pension interest being less that the amount specified in the court order.

What are the non-member spouse’s options?

The non-member may either cash in their portion of the fund awarded to them or transfer the pension interest tax-free into any approved retirement fund. If the non-member spouse elects to cash in the benefit, it will be taxed as a withdrawal in their name.

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