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Retirement fund landmines at divorce

Aug 31 2017 18:28

Cape Town - Sharing the spoils of a failed marriage tends to bring out the worst in people, says Sohini Castille, head of employee benefits consulting at 10X Investments.

“Divorce is a painful and, in many instances, bitter process. Even more so if the parties don’t act in good faith. For many, it’s less about a fair settlement and more about winning the war and punishing the other party. That can manifest in unreasonable demands and in subterfuge, to get one over on the other side,” says Castille.

Clients and others regularly exhibit this type of attitude in questions posted on the 10X website on the subject of retirement funds and divorce.
“As men often have the larger retirement savings, it is frequently women who risk losing out,” says Castille.
    
The laws governing this – the Divorce Act, the Pension Funds Act and the Income Tax Act – are clear. But, Castille says, they are also precise, facilitating numerous circumstances – sometimes created deliberately – that can leave one partner with less than expected, or even empty-handed.  

“Seeking redress from a former spouse can prove frustrating and fruitless and delay the ‘clean break’ that many seek. It is much better to identify the danger areas beforehand,” she says.

Beware of pension pay-outs before the divorce is finalised

Castille explains that to meet the legal requirements the divorce order must assign a specific “pension interest” in the fund of the former spouse (referred to as the member spouse).
   
“The legal definition of “pension interest” refers to the fund benefit at divorce date. If there is no benefit the “pension interest” is zero. The divorce order must, therefore, be granted and executed before the member spouse exits the fund,” says Castille.
 
“This is especially where the joint estate has minimal assets (apart from the retirement fund). It is not unheard of for the member spouse to resign in order to claim the fund benefit before the divorce is finalised. In theory, the proceeds fall into the joint estate but, in practice, the spouse’s share of the benefit would have to be recovered from the former fund member directly. This can prove difficult, especially if the money has already been spent.”

To avoid the fund benefit being alienated in this manner, your divorce lawyer should request the responsible fund administrator to put a hold on any claims pay-out, pending the final divorce agreement.

The divorce decree is not binding
     
The administrator can make a divorce payment only if the divorce order is binding on the fund2. To be binding it must meet certain conditions.

“As these pay-outs are a sensitive and contentious issue, administrators stick to the letter of the law, which can lead to claims being rejected,” says Castille.
 
If the divorce order is not binding, the manager will inform the affected party. “As the error cannot be amended by agreement between the parties, they would need to request an amended order from the responsible court,” says Castille, “and that would cost time, money and effort.”  

No interest on delayed claims

“Pension interest” is defined with reference to the fund value at date of divorce, and the fund is not liable for interest on that balance thereafter.

Castille says: “All subsequent investment returns accrue to the member spouse. A non-member spouse should, therefore, lodge their claim as soon as possible.” The fund is liable for interest only if it does not pay out within the time frames stipulated in the act – but that applies only once a claim has been submitted.

Alienation of the fund benefit

Further motivation for claiming as early on as possible is that the other party may attempt to and succeed in claiming the entire benefit after the divorce.
 
“If the fund has not been ordered to endorse its records (reflecting the ex-partner’s entitlement) and the member spouse makes a false declaration on their marital status (ie “married” rather than “divorced”), the non-member spouse runs the risk of losing out,” says Castille.
 
Consider the tax impact

She also points out that if the non-member spouse chooses to withdraw rather than preserve their share of the fund the pay-out is reduced by tax, as per the withdrawal lump sum tax table.
 
“As of 1 March 2009, this comes off the pay-out of the claiming party. When stipulating a rand value in the divorce settlement, it is important to take the tax into account,” says Castille.

Early withdrawal from a retirement annuity

“If the member spouse invested in a policy-based retirement annuity (RA), the life company will likely impose a penalty (or “causal event charge”) for withdrawing or transferring a share of the RA to another company.

According to Castille, that’s because early withdrawal breaks the contract terms. The penalty will be deducted from the pay-out, which should be factored into settlement negotiations.

A claim does not extend to annuities

Once the member spouse has withdrawn from the fund, the “pension interest” is zero. Even if a former spouse was awarded a share of the pension interest in the divorce settlement, this right cannot be enforced against any annuities taken out with the fund benefit.

“Once the transfer has happened the annuity can legally no longer be split. All payments must be made into their bank account,” says Castille.

To the extent that the annuity is “fruit” of the marriage, the member spouse would have to equate for the value of the annuity. Ideally, the non-member spouse would receive a compensating lump sum.

“If the two agree to share the income by way of a maintenance order included in the divorce agreement, they are tied to each other with the non-member reliant on the goodwill of their ex to hand over their money on time,” says Castille.

You have no rights should the annuity holder die

On the passing of the living annuity holder any remaining funds don’t fall into the estate but go to nominated beneficiaries. Financial dependants are not protected, there is no duty to nominate the former spouse, and beneficiaries are not bound by the divorce settlement.

Unless the deceased’s testament provides for the former spouse’s maintenance from the estate they will probably go empty-handed. It is clear that such sharing arrangements put a non-member spouse in a vulnerable position, another reason that asking for an upfront cash settlement is the safer option.

Rather be safe than sorry

According to Castille, “Even if the expectation is that the member spouse will act with good intentions, it’s better to err on the side of caution.

“Divorcing non-member spouses should take care to obtain a binding divorce order as well as to ensure their former partner does not alienate the benefit before or after the divorce.

They should also take into account the various charges and taxes that might reduce their pay-out.

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10x investments  |  retirement  |  divorce  |  money
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