The clean break principle in respect of divorce was introduced into our law on 13 September 2007 and basically means that on divorce a non-member spouse is now entitled to claim his/her share in the member spouse's pension interest as soon as the parties are divorced.
Practically, the fund has 60 days from receipt of the valid divorce order to transfer the benefit into the non member spouse's name.
Sections 7(7) and 7 (8) of the Divorce Act govern the distribution of fund benefits on divorce, and should be read together with section 37D of the Pension Funds Act as well as various sections in the Income Tax Act. In terms of section 7(7) of the Divorce Act, everyone married in community of property or out of community of property with the accrual system may qualify for an award against the other spouse’s retirement fund in terms of the Divorce Act. But where there is an ANC excluding the Accrual or excluding profit and loss entered into after to 1984, you will not qualify for an award in this regard.
What is the non-member spouse entitled to?
Section 7(7) of the divorce act refers to "pension interest". This concept is specifically defined in the Act and distinguishes between pension funds on the one hand, and retirement annuity funds on the other.
- Pension funds (this includes Provident and Preservation Funds): the non-member spouse is entitled to share in the benefit that the member would have been entitled to had the member resigned from the fund on the date of divorce (i.e. the member’s withdrawal benefit). That means that if the member has, for example, a housing loan from the fund, this amount (plus tax) must first be deducted and the non-member may then share in the balance.
- Retirement Annuity Funds: the non-member spouse may share in the total amount of the member’s contributions to the fund up to the date of the divorce, plus annual simple interest on those contributions up to that date.
It is important to note that both the share of fund, and the contributions paid are taken from the start of the member’s membership on the fund, and not from the start of the marriage.
It is also interesting to note that the non-member may be allocated up to 100 percent of the defined pension interest.
What options does the non-member spouse have?
- They can either preserve the benefit and transfer it into a fund in their own name — so if the member’s fund is an RA, they can transfer their share to an RA in their own name or if it is a pension or provident fund they can transfer it either to a preservation fund or an RA; alternatively
- They can cash the fund benefit in.
Article continues on page two and three: How does the tax work? Are there any formalities that must be adhered to? What financial planning opportunites present themselves in the context of divorce?