The big split

Since September last year, divorcees have been able to receive a portion of their ex-spouse’s pension fund without waiting until retirement. But confusion about the taxation of these funds and whether divorce orders prior to the change in legislation qualify has meant that the payment has often not been made.

In this year’s budget speech, Finance Minister Trevor Manuel indicated that the Treasury would provide clarity on this issue.

The background

Before this change in legislation last year, divorcees would only receive the funds awarded to them in the divorce contract when their ex-spouse was paid out his or her retirement funds because of death, dismissal, resignation or retirement. Moreover, the amount paid was based on the value at the date of divorce and did not include any growth on the asset.

This had obvious implications. Divorced people would prefer to settle all their financial issues immediately and not have to deal with it many years later. In addition, if the ex-spouse could have invested the money in his or her own name, he or she would have benefited from growth. This “clean break” principle is a good one, but legislation has not kept pace.

The issues

  • According to Old Mutual, the interpretation of its legal advisers is that the amendment to the legislation does not extend to divorce orders made prior to September 13 2007. Therefore any payment for a divorce before September 13 2007 must be made by the board of trustees, not the pension-fund manager. The Financial Services Board plans on lobbying Parliament for a change to legislation so that it will apply to all divorce orders. This decision is expected within the next few months.

  • The South African Revenue Service had a problem with how the withdrawal should be taxed and in whose hands it would be, as retirement savings are pre-tax savings and tax does apply to withdrawals. According to this year’s budget, divorce-settlement payments made by retirement funds will be taxable in the hands of the non-member spouse.
  • Jenny Gordon, senior legal adviser of Product Solutions at Old Mutual, says that once these issues have been finalised, the pension-fund companies will begin the process of making payments. But she says claimants will have to be patient as there are real administration constraints — Old Mutual alone faces 27 000 divorce orders that it will have to pay out, and this process will take time.

    Gordon says there are also product issues with early withdrawal penalties. Although these have now been standardised, there could still be a penalty involved and one should ask for the surrender values before cashing in rather than the investment value.

    “The non-member spouse has several options. He or she can continue to save into another retirement fund and not pay any tax or he or she can extract the money from the fund as a lump sum and invest freely,” she says.

    Financial advice is critical before making a decision and the adviser needs to be familiar with the legal implications.

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    Maya Fisher French
    Guest Author

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