Understanding Pension Interest Clauses in Divorce Settlements: What You Need to Know

When a marriage ends in divorce, one of the most significant financial considerations is how retirement savings and pension interests are handled. In South Africa, the division of pension interests can be a complex issue, and it is essential that the correct wording is used in divorce settlement agreements to ensure that both parties’ rights are protected.

This blog will unpack what pension interest clauses are, how they work in divorce settlements, and why accurate wording is critical.

What is Pension Interest?

In South African law, “pension interest” refers to the benefits a spouse is entitled to in terms of their membership of a retirement fund as of the date of divorce. This includes pension, provident, preservation, and retirement annuity funds. The division of these funds in divorce proceedings is governed by Section 7(7) and 7(8) of the Divorce Act 70 of 1979.

In simple terms, pension interest is the amount that would have been payable to the member if they had resigned from their employment on the date of the divorce. It ensures that retirement benefits accrued during the marriage are taken into account when dividing the couple's assets.

How Pension Interest Clauses Work in Divorce Settlements

When a couple divorces, the non-member spouse (the spouse not belonging to the retirement fund) may claim a portion of the member spouse's pension interest. This claim can be made in a divorce settlement agreement, which is then made an order of the court.

However, for the non-member spouse to receive their share of the pension interest, the divorce order must comply with the provisions of the Pension Funds Act 24 of 1956, as amended. The fund administrator will look to the wording of the divorce order to determine whether the non-member spouse is entitled to any benefits. If the wording is incorrect or ambiguous, the non-member spouse may not receive their share of the pension interest.

The Importance of Correct Wording in Divorce Orders

For a pension fund to recognise the claim of the non-member spouse, the divorce order must clearly state that the pension interest is to be divided. Without proper wording, the pension fund may reject the claim, which can result in costly delays and legal disputes.

To ensure compliance with the Pension Funds Act and relevant case law, the following key elements must be included in the wording of the divorce order:

1. Reference to Pension Interest: The order must explicitly refer to the member spouse's pension interest as defined in Section 1 of the Divorce Act.

2. Identification of the Retirement Fund: The name of the retirement fund must be stated to ensure the administrator knows which fund to approach. If there are multiple funds, each must be listed individually.

3. The Percentage or Amount of the Pension Interest: The order must specify the portion of the pension interest to be assigned to the non-member spouse, either as a percentage or a fixed amount.

4. Date of Division: The order should clarify that the division of the pension interest will take place as at the date of divorce. This ensures that the non-member spouse’s claim is based on the correct value of the pension interest.

5. Payment to the Non-Member Spouse: The order must direct the retirement fund to pay the assigned portion to the non-member spouse, either directly or into their own retirement fund, depending on the settlement agreement.

Sample Wording for Pension Interest Clauses

To ensure clarity and compliance with the relevant legislation, the following is an example of wording that should be used in a divorce settlement agreement:

"It is ordered that the Plaintiff/Defendant is entitled to 50% (or other percentage) of the Defendant’s/Plaintiff’s pension interest with [name of the pension fund] held under investment/membership number ____________ , as at the date of divorce, as defined in Section 1 of the Divorce Act 70 of 1979, and that the [name of the pension fund] is directed to pay the assigned portion of the pension interest to the Plaintiff/Defendant in accordance with Section 37D of the Pension Funds Act 24 of 1956, as amended."

This wording ensures that:

• The pension interest is defined according to the Divorce Act;

• The retirement fund is identified;

• The division is clear (whether by percentage or fixed amount);

• The payment is directed to the non-member spouse as per the Pension Funds Act.

Key Considerations

• Tax Implications: When a pension interest is assigned to the non-member spouse, there may be tax implications, as payments from retirement funds are taxable. It is important to obtain professional advice on how the division of the pension interest will affect both parties’ tax liabilities.

• Administrative Process: Once the divorce order is issued, the pension fund administrator will require certain documents from both parties to process the claim. This may include the divorce order, identity documents, and banking details. The non-member spouse may also need to decide whether to receive the payout in cash (subject to tax) or to transfer it into another retirement fund to avoid immediate tax consequences.

• Time Frames: Under the Pension Funds Act, the retirement fund has a duty to make payment of the non-member spouse’s share within a reasonable time after receiving the necessary documentation. However, this process can still take several months, so it is important to be patient and ensure that all paperwork is submitted correctly.

Conclusion

Pension interest clauses in divorce settlements play a crucial role in ensuring that both parties receive a fair share of the retirement benefits accumulated during the marriage. However, without the correct wording, the non-member spouse may face challenges in enforcing their right to a portion of the pension interest.

If you are going through a divorce, it is vital to ensure that your settlement agreement is properly drafted and includes all the necessary details regarding pension interest. Consulting with an experienced family law attorney will help ensure that your financial interests are protected and that the settlement is legally enforceable.

For advice on pension interest clauses or assistance with your divorce settlement, contact our law firm today for professional legal guidance.