The administrative changes introduced by the1 September 2024 two-pots retirement solution implementation have largely bedded down, freeing up employee benefits consultants, human resources professionals, and retirement fund administrators to explore some of the less frequent transaction types.

On retirement savings and divorce

One of the challenges is how to navigate recent legislative changes to the Pensions Fund Act (PFA) following a divorce. Dionne Nagan, Legal Counsel at Ninety One, has provided FAnews with a detailed write-up of how retirement savings should be handled should such an eventuality arise. Today’s newsletter is largely unchanged from the original piece, with minor tweaks, and our own open and close. 

Nagan writes: For financial advisers, understanding how marital property regimes and legislation intersect is critical to supporting clients. The good news is that recent legal updates, effective from 1 September 2024, have aligned the definition of ‘pension interest’ across fund types; but this does not mean your clients (and legal counsel) can neglect the wording on their divorce orders. The details can make or break the enforceability of an order, and ultimately, determine whether your clients experience a smooth or frustrating outcome. 

The impact of marital regimes on pension interest

South Africa recognises three matrimonial property regimes, each with implications for the division of pension interest on divorce. 

In community of property: All assets, including pension interest, are jointly owned and therefore divisible.
Out of community with accrual: Spouses maintain separate estates but share in the growth of those estates during the marriage. Importantly, pension interest forms part of the accrual calculation.
Out of community without accrual: Also known as ‘cold exclusion’ there is no sharing of assets during or after the marriage. Pension interest cannot be claimed under this regime. 
Unless a couple signs an ante-nuptial or post-nuptial agreement, the default regime is in community of property. The marital property regime between your client and his or her ex-spouse will determine whether a claim to pension interest is even possible. 

Defining ‘pension interest’

Pension interest was previously defined by fund type, but from 1 September 2024, a new definition was inserted in the legislation to bring uniformity. It is now calculated as the member’s benefit in the fund, as determined by the fund’s rules, on the date of the divorce order. This new definition applies to all retirement funds, including retirement annuity funds. And although the older definition in the Divorce Act technically remains in place, the PFA now overrides it for any divorce orders granted from 1 September 2024 onwards. 

It helps to understand more about how provisions in the PFA and Divorce Act play out in the real world. The first thing to note is that while the way pension interest is defined has changed, the legal requirements for a valid divorce order remain the same. In other words, the PFA still requires that your client’s divorce order meets the conditions in the Divorce Act before a retirement fund can act on that order. Here are three useful observations to help you guide your client through the divorce order process. 

The three things you must do

First, the fund must be identified or identifiable. Ideally, the fund name and policy number should be included in the divorce order. If a member has more than one policy, and no policy number is given, the pension interest will be split across all relevant policies in the fund. If the member belongs to more than one fund but only one fund is identified, the order is not binding on the other funds. 

Second, pension interest must be explicitly awarded. The divorce order must refer specifically to ‘pension interest’. References to ‘fund value’ or ‘fund benefits’ are insufficient. The order must also clearly state either a percentage or a rand amount of pension interest. 

Third, the fund must be instructed to pay. The divorce order must direct the fund to make the payment, not the member spouse. And simply endorsing the fund’s records is not enough. 

It is strongly recommended that parties submit a draft order to the affected retirement fund for review before finalising it in court. If an order is found to be non-binding, it must be amended, in which case the pension interest is still calculated using the original divorce date, and not the date of the amendment. 

Payment options for non-member spouses

Once a valid divorce order is in place, the non-member spouse has two choices for receiving the pension interest. They can opt for a lump sum which will be taxed in the non-member spouse’s name, according to the withdrawal tax tables. Or they can opt for a tax neutral transfer of the pension interest to another retirement fund. Non-member spouses cannot combine these options; they must choose one. Very important: in the event the divorce order specified a rand amount, and a lump sum is chosen, the amount paid out will be after tax. 

The astute EB consultants and financial planners among our readership will be wondering: What happens if fund withdrawals are made during pending divorce proceedings? Fortunately, the legislation offers some protection here. Where a fund is notified, with proof, that divorce proceedings are underway, any instruction by the member spouse to withdraw from the savings component cannot be processed without the written consent of the non-member spouse. This safeguard also applies in cases involving religious marriages and continues until the divorce is finalised. 

What this means for financial advisers, planners

Nagan summarised the key points for financial planners as follows. The definition of ‘pension interest’ has been standardised across retirement fund types from 1 September 2024. From that date, your client’s legal entitlement to his or her pension interest depends on the matrimonial property regime. The wording of the divorce order is critical. 

Advisers should be aware of the legal requirements; but consultation with clients’ legal representatives is key to ensure the divorce order can be enforced. It is highly advised that your client submits a draft divorce order to the relevant fund for review, to avoid non-binding outcomes. You can also assure your clients that withdrawals during the divorce proceedings are restricted to protect non-member spouses. 

These changes aim to bring greater alignment across fund types, but the legal requirements for enforceable orders remain rigorous. Understanding the updated framework and ensuring precise wording in divorce orders can help your clients avoid delays and unintended outcomes. At a time when clarity and certainty are especially valuable, attention to detail can make a meaningful difference.