Divorce and Pensions

Navigating recent legislative changes.

When couples divorce, the division of assets can become a complex matter, particularly where retirement savings are involved. For financial advisors, understanding how marital property regimes and legislation intersect is critical to supporting clients.

Recent legal updates, effective from 1 September 2024, have aligned the definition of ‘pension interest’ across fund types – but getting the wording of divorce orders right remains just as important. The details can make or break the enforceability of an order and ultimately determine whether 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. Pension interest forms part of the accrual calculation.
• Out of community without accrual: 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 antenuptial or post-nuptial agreement, the default regime is in community of property. This legal backdrop determines 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 in the Pension Funds Act has brought uniformity.

It is now calculated as the member’s benefit in the fund, 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.

Although the older definition in the Divorce Act technically remains in place (see below), the Pension Funds Act now overrides it for any divorce orders granted from 1 September 2024 onwards.

Why divorce order wording matters

While the way pension interest is defined has changed, the legal requirements for a valid divorce order remain the same. The following conditions must be met for a retirement fund to act on the order:

• The fund must be identified or identifiable. Ideally, the fund name and policy number should be included. 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.
• Pension interest must be explicitly awarded. The order must refer specifically to "pension interest". References to “fund value” or “benefits” are insufficient.  The order must also state either a percentage or a rand amount of pension interest.
• The fund must be instructed to pay. The order must direct the fund to make the payment, not the member spouse. Simply endorsing the fund’s records is not enough.

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

Payment options for non-member spouses

Once a valid order is in place, the non-member spouse has two choices:

• Lump sum: Taxed in the non-member spouse’s name, according to the withdrawal tax tables; or
• Transfer to another approved fund: A tax-neutral option.

Non-member spouses cannot combine options – they must choose one.  If the order specifies a rand amount and a lump sum is chosen, the amount paid out will be after tax – i.e. the stated figure is a gross amount.

Withdrawals during pending divorce proceedings

Where the fund is notified (with proof) that divorce proceedings are under way, 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 advisors

• Definition of pension interest is now standardised across fund types from 1 September 2024.
• Legal entitlement to pension interest depends on the matrimonial property regime.
• Order wording is critical. Advisors should be aware of the legal requirements, and consultation with clients’ legal representatives is key to ensure the order can be enforced.
• Draft orders should be submitted for review to the relevant fund to avoid non-binding outcomes.
• Withdrawals during divorce 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 clients avoid delays and unintended outcomes.  At a time when clarity and certainty are especially valuable, attention to detail can make a meaningful difference.

Pre-1 September 2024 definition of ‘pension interest

For divorce orders granted before 1 September 2024, pension interest is defined in Section 1 of the Divorce Act as follows:

• In the case of a member of a pension fund or provident fund (including preservation funds), it refers to the benefits the member would have been entitled to under the rules of the fund, had their membership been terminated on the date of the divorce due to resignation from their office.
  
  
• In the case of a member of a retirement annuity fund, it refers to the total amount of the member’s contributions to the fund up to the date of divorce, plus the accumulated simple interest on those contributions (calculated at the rate prescribed as of that date by the Minister of Justice under Section 1(2) of the Prescribed Rate of Interest Act, 1975, provided it does not exceed fund return).
  
  
• The interest rate referred to above is calculated as the repurchase rate as determined from time to time by the South African Reserve Bank, plus 3.5% per annum. For example, if the repurchase rate is 7%, then the interest rate used to calculate pension interest will be 7% plus 3.5%, which is equal to 10.5%.

WRITTEN BY DIONNE NAGAN

Dionne Nagan is a retail legal expert

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein.  Our material is for informational purposes.