How Retirement Funds Are Dealt with in Divorce:

Navigating Complex Financial Decisions Across Different Marriage Types

By Jonathan Theunissen, CFP?

Divorce is never easy, and when retirement funds are involved, the financial complexities can add additional stress. In South Africa, the treatment of retirement products during divorce is governed by a series of legislative provisions, including the Divorce Act 70 of 1979, the Pension Funds Act, and the Income Tax Act (ITA). These laws, particularly sections 7(7) and 7(8) of the Divorce Act, offer guidance on how retirement funds are split between spouses. The division of these assets can also vary depending on the type of marriage or union, whether it is a civil marriage, Islamic marriage, customary marriage, foreign marriage, or civil union.

In this article, we explore how different marriage types influence the treatment of retirement funds during divorce and what you need to consider as you navigate this challenging process.

1. Types of Marriages and Their Impact on Retirement Funds Civil Marriages

In civil marriages, the division of retirement funds is largely determined by the type of marital regime:

• In Community of Property: Both spouses share a joint estate, meaning that all assets, including retirement funds (referred to as “pension interest”), are equally divided upon divorce.

• Out of Community of Property with Accrual: The spouse whose estate increased more during the marriage shares a portion of their accumulated wealth, including pension interest, with the other spouse upon divorce.

• Out of Community of Property without Accrual: Here, pension interest is generally excluded from division unless the couple’s ante-nuptial contract specifically includes it.

A divorce order must specifically reference section 7(8) of the Divorce Act to ensure that the non-member spouse can claim a portion of the “pension interest”.

Islamic Marriages

Historically, Islamic marriages were not recognized in terms of the Marriage Act however the Constitutional Court has held that the Marriages Act, Divorce Act and common law definition of marriage is inconsistent with the Constitution and thus legislation is being updated to recognise Islamic marriages.

Certain parts of South African law already recognise Islamic marriages. Section 37D of the Pension Funds specifies that a retirement fund may deduct any amount to a non-member spouse in terms of any order made by a court in respect of the division of assets of a marriage under Islamic law pursuant to its dissolution. The division of assets must be stipulated in a court order but no reference to pension interest is required, therefore any amount stipulated in the order will be deducted by the fund.

Customary Marriages

Customary marriages are fully recognized under South African law through the Recognition of Customary Marriages Act 120 of 1998 (RCMA). All monogamous and polygamous customary marriages (whether registered or not) entered into after the RCMA was introduced are in community of property, unless the spouses entered into an ANC.

Section 7(1) of the RCMA was amended in June 2021 to provide that spouses in a polygamous customary marriage entered into before the act came into effect have joint and equal ownership and rights of management and control over matrimonial property.

All customary marriages must be registered with Home Affairs but, not registering will not affect the validity. Dissolution of a customary marriage must be in terms of an order of court.

Section 37D of the Pension Funds Act makes specific reference to customary marriage and stipulates that “pension interest” must be included in the wording of the divorce order.

Foreign Marriages

Foreign marriages are recognized based on the legal validity of the marriage in the country where it was conducted. These marriages are not governed by the Marriage Act, Divorce Act, or Matrimonial Property Act. Upon divorce one needs to approach the High Court in South Africa to make an application in terms of the Enforcement of Foreign Civil Judgments Act. The “pension interest” wording must be complied with.

Civil Unions

Civil unions, governed by the Civil Union Act 17 of 2006, offer the same legal recognition as civil marriages, meaning that retirement fund division follows the same rules.

2. Understanding “Pension Interest” in the Divorce Act

The term pension interest plays a central role in determining the portion of retirement funds that can be divided upon divorce and it differs depending on what product you are invested in.

• Retirement Annuities: The total contributions made by the member up to the date of divorce, together with annual simple interest.

• Retirement Funds: The benefit to which the member would have been entitled to in terms of the rules of the fund if his/her membership had terminated on the day of divorce on account of resignation.

3. Proper Wording in the Divorce Order

For the non-member spouse to receive their share of the retirement funds, it is crucial that the divorce order references section 7(8) of the Divorce Act. If the wording is incorrect, the pension fund cannot legally act on the order.

4. Options for the Non-Member Spouse

As a non-member spouse, you have two options regarding how to handle your share of the retirement funds once the divorce order is finalized:

• Cash Withdrawal: You can choose to take your portion as a lump sum, but this option comes with immediate tax consequences. The amount you receive will be taxed according to the retirement fund withdrawal lump sum tax table.

• Transfer to Another Retirement Fund: You may elect to transfer your share of the retirement funds to another approved retirement product, such as a pension fund, provident fund, preservation fund, or retirement annuity fund. This option is tax-free at the time of transfer, though taxes will apply when the benefits are eventually withdrawn at retirement.

The election must be made within 120 days of being notified by the fund. If no election is made, the fund will automatically make a cash payout within 30 days.

5. Living Annuities

A living Annuity is an income providing long-term insurance policy, governed by the Long-Term Insurance Act 52, of 1998. The Supreme Court of Appeal judgment in the Montanari case confirmed that capital in a living Annuity belongs to the insurer and that “pension interest” no longer exists, however future annuity income must be declared as an asset for the accrual calculation. There was, however, no explanation as to how the value should be calculated and no order made instructing the insurer to deduct any amount. The matter has been sent back to the High Court to determine the manner in which to calculate the future annuity income as an asset.

6. Moving Forward

Dividing retirement funds during a divorce is a complex process that requires careful consideration of your marriage type, pension interest, and tax implications. Whether your marriage is civil, customary, Islamic, or foreign, understanding how these rules apply to your situation is crucial in protecting your financial future.

Our team of financial planning professionals is here to help you navigate these challenges with empathy and expertise. If you have any questions or need advice tailored to your unique situation, don’t hesitate to reach out. We are committed to helping you protect your financial well-being and build a secure future.

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