The Divorce Act provides for a pension interest to be divided on divorce, but a pension interest excludes a monthly pension from a guaranteed annuity or an investment-linked living annuity that was bought with retirement fund savings. It also excludes any withdrawal benefit paid out on resignation or retrenchment or as a lump sum on retirement.
Lize de la Harpe, the legal adviser at Glacier by Sanlam, says she is often asked why a divorcee cannot claim a share of an annuity paid to his or her former spouse who belonged to a retirement fund.
She says the answer lies in how the Divorce Act defines a pension interest. The definition refers to a notional benefit that would have been paid to someone if his or her membership of a fund had terminated on the date of the divorce – that is, the benefit the member would have been paid if he or she had left the fund when resigning from his or her job on the date of the divorce.
In the case of a retirement annuity fund, the Divorce Act states that the pension interest is all the contributions made to the fund, plus simple interest (not actual returns earned) on those contributions to the date of divorce.
Benefits that have been paid to a fund member, or that have accrued (the benefit is due to be paid) to a member, are excluded from a pension interest (as defined by the Divorce Act) and therefore the retirement fund from which the benefits were paid cannot be asked to pay these to a former spouse. These benefits include any withdrawal benefits, or benefits paid to a life assurance company to buy a guaranteed annuity, or benefits invested in a living annuity.
Common law principles and the division of matrimonial assets cover benefits that have already been paid from the fund.
When a divorce order or settlement agreement is drafted, it is important to establish whether the fund member has or will become entitled to a pension benefit before the date on which the divorce is granted, De la Harpe says.
If your divorce order is granted after your spouse is no longer a member of a fund – even if you issued summons before he or she left the fund – and your divorce order says you are entitled to a share in the pension interest, the order will be of no value to you, because benefits that have been paid out are not included in the definition of a pension interest, Kobus Hanekom, the head of strategy, governance and compliance at Simeka Actuaries & Consultants, says.
De la Harpe says it is also important to bear in mind that an annuity cannot be transferred or ceded to another person or institution, or attached by a court to recover a debt, or sold.
However, she says that all is not lost for the non-member spouse. The income from an annuity will form part of the member spouse’s total assets. If he or she receives an annuity bought with proceeds from a retirement fund and the annuity is his or her only or greater source of income, the non-member spouse can access this income by way of a maintenance order within the divorce order.
Settlement agreements often try to cater for splitting an annuity and paying half of it into the bank account of the spouse who did not belong to the fund, De la Harpe says.
In practice, life assurers do not allow the income to be split between the spouse who belonged to the fund and the spouse who did not; assurers pay the annuity to the spouse who belonged to the fund, who will be taxed on it at his or her marginal rate, she says. It is then the responsibility of the spouse who belonged to the fund to pay maintenance – in accordance with the divorce order – to the spouse who did not.
The Financial Services Laws General Amendment Act recently amended the Pension Funds Act to include a member’s pension interest and the capital value of a pension after retirement in the deductions that can be made from a retirement fund for pension interest awards in divorce and maintenance orders, De la Harpe says.
The amendment does not mean that the capital invested in a living annuity can be split with a former spouse, she says. This is because someone ceases to be a member of a retirement fund when he or she retires and buys a member-owned annuity. The former member would have been paid all the benefits that were due to him or her.
Even if it could be argued that the amendment aims to include a pension paid by a retirement fund – that is, a fund-owned annuity – the amendment cannot provide for a pension to be shared, unless the definition of a pension interest in the Divorce Act is amended to include such an annuity, De la Harpe says.
The amendment might have been intended to close the loophole whereby someone can retire from a fund and buy an annuity in order to exclude this money from the scope of a pension interest, but this intention will also not be realised unless the definition of a pension interest in the Divorce Act is amended, De la Harpe says.