Available options, tax liability and other questions discussed.
It is that reward that makes all the hard work worth it in the end. The security to look forward to after a lifetime’s hard toil at the office. The single factor that made the difference in a decision to leave one job for another, maybe even the convincing factor that caused you to pack up everything and move to another town or city. A good pension for your old age.
In some instances, when determining the patrimonial benefits that a party to a divorce may be entitled to, the pension interest of a party can be deemed to be part of his or her assets. For purposes of a divorce, pension interest, can include the benefit entitled to in terms of a pension fund as well as the contributions made towards a retirement annuity.
WHAT IS A PENSION INTEREST?
Where a party to a divorce is a member of a pension fund (“member spouse”), his or her pension interest is the benefit that he or she would be entitled to on the date of the divorce if he had resigned from his or her office on that same date;
In the case of an annuity fund, it means the total amount of the member spouse’s contributions to the fund up to date of divorce plus the total amount of annual simple interest on those contributions up to the date of divorce. This interest is calculated at the same rate as prescribed in terms of the Prescribed Rate of interest Act.
In terms of section 7(7) of the Divorce Act, the pension interest of a member spouse shall form part of his or her assets for purposes of determining the patrimonial benefit a non-member spouse may be entitled to. This, however, does not apply in all instances. If parties were married after 1 November 1984 in terms of an antenuptial contract, out of community of property with the exclusion of the accrual system, the section 7(7) provision does not apply.
Where the provisions of section 7(7) do apply, the amount deemed to be part of the assets of a member spouse, must first be reduced by any amount of his or her pension interest awarded to another party in a previous divorce or by any loan or guarantee amount (provided for in section 37D of the Pension Fund Act) granted prior to the divorce order.
In terms of the Pension Funds Bill, (if signed into law), a pension fund will not, without the consent of the non-member spouse, be allowed to grant a loan or guarantee or permit a savings withdrawal benefit to be taken by a member if the fund received a formal notification from the member or non-member spouse that a divorce has been instituted. This prohibition will remain in place until the granting of an order.
PENSION INTEREST AND UNCONTESTED DIVORCES
If the parties reach a settlement agreement in respect of the division of their assets, the court, in granting a decree of divorce, may make an order dividing the assets of the parties or the payment of maintenance as agreed between them. In this instance, the assets being divided by agreement may include the pension interest of one of the parties i.e. benefit in a pension fund or contributions made in respect of a retirement annuity (together with interest thereon).
TIMING IS EVERYTHING
Irrespective of whether the parties reach a settlement or not, a court order, instructing a pension fund to pay a portion of the pension interest to the non-member spouse, must be granted before the member spouse’s membership is terminated. If the order is granted once the member-spouse is no longer a member of the pension fund, the pension fund cannot give effect to the court order. Where the court order is based on a settlement agreement, the parties will have to amend their settlement and approach the court for a variation of the court order.
WHAT TO INCLUDE IN THE COURT ORDER?
To make sure that effect is given to the order by the pension fund, the court order must comply with the provisions of section 37D of the Pension Fund Act. Failure to comply with these provisions will result in much frustration and may require an amendment to the settlement agreement and an application for the variation of the court order.
The pension fund must be named or identifiable from the order – this may require that the registered name of the fund together with the policy number or reference of the policy in question be recorded in the decree. The amount or percentage of the pension interest which is to be deducted must be recorded as well as a provision specifically ordering the pension fund to make payment or transfer the amount in question.
To avoid any unnecessary difficulty, it is advisable to also obtain written confirmation from the pension fund beforehand that the wording of the order will be given effect to.
WHAT OPTIONS ARE AVAILABLE TO THE NON-MEMBER SPOUSE?
The non-member spouse can elect to have the portion of the pension interest paid directly to him or her or for it to be transferred to another pension fund on his or her behalf. This decision may have tax implications and it is important for the parties to make sure they obtain expert advice when this decision is made.
WHO IS LIABLE FOR THE TAX?
In terms of the Income Tax Act, any amount of the pension interest of a member spouse, assigned to a non-member spouse in terms of a divorce order, is to be included in the gross income (as defined) of the non-member spouse for any year of assessment. Currently it follows that the non-member spouse will be liable for any tax payable on the amount of pension assigned to him or her. This was, however, not always the case.
It is important for parties to therefore obtain expert advice when considering the tax implications applicable to the transfer of any pension interest. The legal position has changed quite a few times over the last two decades and parties should ensure that they understand the impact of their tax liabilities at the time of their divorce.
WHAT MUST THE PENSION FUND DO?
Once the pension fund has been provided with the court order, that fund must deduct the portion of the pension interest assigned to the non-member spouse on the date which the non-member spouse makes his or her election whether the pension interest is to be transferred to another pension fund or paid out.
If the non-member has not made any election in this regard, the pension fund must within 45 days of receiving the divorce order, request the non-member spouse to make his or her election within 120 days.
If the non-member spouse fails to make an election or to identify the pension fund to which the amount is to be transferred, the pension fund must pay the assigned amount directly to the non-member spouse within 30 days.
Should the pension fund not reasonably be able to ascertain how payment is to be effected to the non-member spouse, it must retain the amount and any returns thereon until such time as the details of how the payment is to be effected, is made available to it.
Article by Andries Stander
Stander Attorneys
DISCLAIMER
The information contained herein should not be used or relied upon as legal advice. No liability is accepted for any errors or omissions, nor for any loss or damages arising from reliance upon any information herein. Contact your legal representative or adviser for specific and detailed legal advice applicable to your factual matrix.
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