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Financial Considerations

Retirement, Pension Funds and Annuities in Divorce Proceedings

There have been a number of recent changes that addresses the inadequacies of previous retirement fund legislation when dealing with divorce. In the past, the spouse (usually the wife) who was not a member of the husband’s retirement fund or retirement annuity was treated very badly. The non-member spouse often had to wait many years before receiving her share of the retirement fund, and wasn't even assured of getting any of the investment growth on the fund subsequent to the divorce. This resulted in frustration and financial destitution for many women.

Legislation now enables divorced couples to make a “clean break”, financially speaking and makes reference to a number of key dates. Because the legislation has been a work in progress, it has perhaps turned out to be more complicated than initially intended.

The technical details of the legislation are beyond the scope of this article, but it is important to be aware that there are different tax treatments, depending on the date of the divorce order.

The key cut-off dates that are important are 13 September 2007 (when the clean break principle became effective) and 01 March 2009 (when the legislation became clearer, simpler and fairer to both parties). Prior to 01 March 2009, the spouse who was the member of the retirement fund ended up paying “tax on tax” on withdrawals. It also wasn't very clear whether the member spouse was then entitled to recover this tax from the non-member spouse. For divorce orders granted prior to September 2007, it may be possible to amend the divorce order. It is advisable to consult a legal expert to see whether this is an option for you.

The most common mistake that is made upon divorce is for the non-member spouse to cash in his or her share of the member spouse’s retirement savings. It would be far more preferable for the non-member spouse to transfer his or her share into their own retirement fund as the transfer is tax-free. If a share of a company Pension or Provident Fund is transferred to a separate Preservation Fund, then under current legislation the non-member spouse still has the option of making a future withdrawal prior to retirement age, if circumstances demand it. Of course the realities of a cash-strapped divorcee may necessitate a withdrawal, but it should only be done if absolutely necessary.

It is not only the immediate tax payable on a retirement fund withdrawal that results in financial loss. Any withdrawal amount that accrues to the non-member spouse has the effect of reducing subsequent tax-free retirement lump sum amounts.

Also be aware that the sale of assets may trigger a Capital Gains Tax (CGT) event. CGT should be taken in to account when determining how best to structure the split or disposal of assets.

Life assurance also plays an important role in proceedings. A common technique is for one ex-spouse to retain an existing life policy on the life of the other. For example, the ex-husband may be responsible for paying the children’s school fees in terms of the divorce order. Should he die unexpectedly, the surviving ex-spouse might then struggle to pay the school fees and hence the life policy could be invaluable. It is important for the life policy to be structured correctly, however. It is not good enough for the ex-wife (in this example) to be the beneficiary only. She should ensure that she is the owner of the life policy, with the ex-husband being the payer and life assured. If she was not the owner of the policy, the ex-husband could change the beneficiary nomination at any time, effectively removing her financial protection.

We would strongly recommend that couples consider obtain input from an attorney, a financial planner and a tax advisor. Our advice is to engage an independent, fee-based certified financial planner who is focused on your best interests and can provide impartial advice. If you do not have a certified financial planner, visit the website of the Financial Planning Institute on to select one.