The benefits of your retirement annuity fund are protected from creditors in the case of insolvency or sequestration. The same, however, cannot be said in the case of divorce settlements.
What happens upon divorce?
When an ex-spouse is awarded a certain amount of pension interest, the divorce decree will usually be worded along these lines:
“The defendant is a member of retirement annuity ABC. 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 Funds Act.”
Pension interest is defined as the total contributions made to the fund between the date of marriage and fina`lisation of the divorce, plus simple annual interest calculated at the prescribed rate.
Pension interest example
Mr. X was married in community of property on 1 March 2002. He divorced exactly 18 years later on 1 March 2020. At the date of divorce his retirement annuity is valued at R1,500,000. He had made the following contributions to his retirement annuity during the term of his marriage:
R100 000 - 1 February 2003
R100 000 - 1 February 2007
R100 000 - 1 February 2011
R100 000 - 1 February 2015
R100 000 - 1 February 2019
Using a prescribed interest rate of 10% per annum (as per the divorce finalization date), the total pension interest would be calculated as follows:
|Date of Contribution||Contributions
||Annual Simple Interest||Pension Contribution Interest|
|01/02/2003||R100 000||R166 631.51||R266 631.51|
|01/02/2007||R100 000||R127 604.79||R227 604.79|
|01/02/2011||R100 000||R88 578.08||R188 578.08|
|01/02/2015||R100 000||R49 551.37||R149 551.37|
|01/02/2019||R100 000||R10 524.66||R110 524.66|
|R500 000||R442 890.41||R942 890.41|
Please note that pension interest calculated using these predefined interest rates may not exceed the actual value of your retirement annuity; if it did, then the actual value of the retirement annuity must be used as the pension interest.
The non-member spouse would then have the following options available to them:
All proceeds taken in cash by the non-member spouse will be taxed in their hands as per the withdrawal tax tables.
Section 14 transfers
Individuals married in community of property, or out of community with accrual, should be cautious when considering the consolidation of their separate retirement annuities. Moving a retirement annuity from one provider to another is classified as a Section 14 transfer. During such a move, the receiving institution may consider the transfer as a single contribution which could drastically inflate the pension interest calculated upon divorce. Rectifying this would be an administrative burden at a very inconvenient time.
This article only deals with pension interest in regard to retirement annuities. Pension, provident, and government employee pension fund divorce settlements may be dealt with differently. Should you require assistance or advice about divorce and your retirement annuity, the financial advisors at NFB Private Wealth are equipped to help you.